LONDON (Reuters) -Peabody Energy on Tuesday withdrew its $3.78 billion bid for Anglo American's Australian coking coal assets after failing to cut the price following a mine fire, with the dispute now set for arbitration.

Peabody had agreed to acquire the mines in Queensland's Bowen Basin, the world's top steelmaking coal region, as the London-listed Anglo moved to sell or spin off non-core assets following bigger rival BHP's failed takeover attempt last year.

The aborted sale sets that process back, after Anglo counted the coking coal assets as discontinued operations at its mid-year results in July.

Peabody shares rose more than 6% in U.S. premarket trade, while Anglo American initially pared gains sharply after the news before recovering to trade 2.9% higher at 1231 GMT.

Operations at the Moranbah North mine were halted in April after an underground fire caused by high gas levels, prompting Peabody to invoke a clause allowing it to walk away or renegotiate if a major adverse event occurred between signing and completion.

"The two companies did not reach a revised agreement to cure the MAC (material adverse change) that compensated Peabody for the material and long-term impacts of the MAC on the most significant mine in the planned acquisition," said Peabody President and Chief Executive Officer Jim Grech.

Reuters could not immediately establish whether a termination fee would be paid.

Anglo on Tuesday said it would "shortly initiate an arbitration to seek damages for wrongful termination," disputing that the fire and mine closure constituted a material adverse change, due to the lack of damage to the mine or equipment and progress made towards restarting it.

"We are therefore very disappointed that Peabody has decided not to complete the transaction," said Anglo's CEO Duncan Wanblad.

Wanblad reiterated that given strong interest for the assets during the bidding process, Anglo was confident an alternative buyer could be found through a new sales process.

(Reporting by Yadarisa Shabong and Clara Denina. Editing by Shilpi Majumdar, Bernadette Baum and Mark Potter)