An ill-tempered, two-hour meeting between Apprentice Boys' representatives and community leaders from the Catholic Bogside area failed to reach agreement over the scale and route of Saturday's march around the old city walls.
Neither side has plans for further meetings and as feelings hardened, nationalists announced plans for a city-centre protest rally on Friday night.
The breakdown in talks after four meetings raises the spectre of a Drumcree- style confrontation when an Orange Order parade past a nationalist area of Portadown, originally banned by the RUC, sparked off disorder throughout Northern Ireland. Many politicians fear that another confrontation in Londonderry may plunge Northern Ireland into its worse crisis for years.
The police may now be forced to step in and impose a solution over the route of the parade, as it tried but failed to do at Drumcree.
A disappointed John Hume, the SDLP leader and local MP who brokered the talks, said: "We will continue to hold meetings with other parties in an attempt to find a compromise."
But there was ritualised mudslinging between the two rival factions, although each one was careful to insist that its intentions were peaceful.
Alisdair Simpson, governor of the Apprentice Boys, said: "It's not our fault we have been unable to find a solution.
"If there is violence it will not come from the Apprentice Boys. I mean that." He added: "We have done everything we can to bring peace and harmony to this city, but we don't know what will happen now. The Bogside residents are being dictatorial."
Donncha MacNiallais, of the Bogside Residents Association, said: "We are bitterly disappointed and we are disappointed at the attitude of the Apprentice Boys during these talks.
"If they come back and accept the principle of consent, and it's not asking a lot, then all things are possible in Derry City." He added: "We will not be pushing anybody into a precipice, or the abyss."
It is understood that the talks stalled over the key issue of the consent of the local community to the parade, which nationalists want extended to all the disputed marching routes.
About 10,000 members of the Apprentice Boys from all over Northern Ireland are expected to converge on Londonderry after parades in their own areas.
The RUC have already re-routed one march away from the Catholic Lower Ormeau Road area of Belfast.
One option, which the police are now considering, is to seal off the old city walls of Londonderry on "security grounds". This was done for more than 20 years until last year's march, which sparked violence.
However, such a move would inflame the Apprentice Boys, who insist that it is their right to celebrate the memory of the 13 apprentice boys who closed the gates of the city to the army of King James II in 1688.
But it is unlikely that Unionists will want to provoke a repeat of the events at Drumcree, which appeared to confirm Unionists' power, but at the cost of damaging mainland and world public opinion.Reuse content