DETROIT (AP) – Advo Inc. shares dropped 22 percent Thursday after marketing company Valassis Communications Inc. filed a lawsuit to terminate its $1.3 billion merger agreement with the nation’s largest direct-mail marketer.

Ed Atorino, an analyst with the Benchmark Co. in New York, said the deal is essentially dead after Valassis accused Advo of fraud.

“Clearly something in the financial information that was provided by Advo to Valassis in recent months was disturbing to Valassis and caused them to withdraw,” he said.

Shares of Windsor, Conn.-based Advo fell $8.21 to close at $28.59 on the New York Stock Exchange, where they have changed hands between $23.06 and $36.85 over the past 52 weeks. Valassis shares lost $1.29, or 6.1 percent, to finish at $19.72 on the NYSE.

“Advo is back where it was before the deal, which makes sense,” Atorino said. “Valassis is also getting hammered, which is a little surprising, but that’s the way it goes.”

Valassis, based in the Detroit suburb of Livonia, said its action filed Wednesday in Delaware Chancery Court was based on allegations that Advo management misrepresented the financial health of the company and failed to reveal internal control deficiencies.

Advo denied wrongdoing and said it intended to enforce the merger agreement announced in early July.

Valassis also is seeking an undisclosed amount of damages from Advo.

Government regulators had approved the merger but Advo shareholders had not given final approval, Valassis spokesman Andy Hopson said.

Valassis announced last month that it was acquiring outstanding shares of Advo for $37 each. The combined company was expected to serve about 20,000 advertisers, including 94 of the top 100 in the U.S., with direct mail, newspaper inserts, coupon fliers, e-mail marketing and other programs.

The combined company would have about 7,900 employees with operations in nine countries, Valassis and Advo said.

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On the Net:

Valassis Communications Inc.: http://www.valassis.com

Advo Inc.: http://www.advo.com

AP-ES-08-31-06 1831EDT