German utility E.ON AG (EOAN.XE) continues to talk with its largest supplier of natural gas-- Russia 's Gazprom OAO (GAZP.RS)--in an effort to adjust the commercial terms of supply contracts, two people familiar with the matter told Dow Jones Newswires.

One of the persons said the negotiations are expected to continue at least until the autumn of this year.

If both companies fail to reach an amicable agreement on new commercial terms of the supply deals by then, the matter could be transferred to an international arbitration court, the person added.

The comments come a day after German media reports said that the talks between E.ON Ruhrgas--the natural gas business of the Duesseldorf-based utility--and Gazprom have broken down.

Like other European natural gas importers, E.ON has been in talks with suppliers for months.

Profit margins at E.ON's wholesale gas have been under severe pressure due to the disconnect between long-term, oil-indexed procurement prices and the lower selling prices to customers.

The negotiations are delicate with billions of euros at stake for both companies.

E.ON sources about one quarter of its gas from Russia and in light of the around 20 billion cubic meters it buys there, even small price reductions would result in massive revenue shortfall for Gazprom.

The German utility, meanwhile, previously described the gas wholesale business as its "biggest operating risk" and pledged to push for price reduction of long-term supply contracts in talks with producers.

In May, Chief Financial Officer Marcus Schenck said E.ON had managed to pushed through price reductions for a large chunk of its long-term gas supply contracts with producers that should shield the company from losses.

At the time, however, Schenck had added that E.ON still expects it wholesale gas business to record a loss of around EUR1 billion in 2011.

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