In a one-page letter, Mitsui Trust & Banking Co. Wednesday informed Dowling's Honolulu Real Estate Partners VIII L.P. that it was terminating the transaction, said Rick Tsujimura, the partnership's attorney. Tsujimura said both sides disagreed over some of the transaction's terms, which he declined to reveal.

"The deal's off," Tsujimura said.

Chad Griffith, Mitsui's attorney, said yesterday that Mitsui rejected Honolulu Real Estate Partners because the bank didn't believe that Dowling's group could complete the sale soon. He said that Mitsui is looking at other options, which he declined to disclose.

Griffith said the breakdown will not affect the daily operations of the waterfront restaurant and retail complex on state land at Honolulu Harbor.

The collapse of the complicated mortgage sale comes as Mitsui has held off legal action against the developer of the project, Aloha Tower Associates.

Mitsui in August filed a foreclosure suit against Aloha Tower Associates, alleging the developers made no payments on a $60 million loan it issued in September 1993. But the bank agreed to delay foreclosure proceedings so that it could complete the transaction with Honolulu Real Estate Partners.

Aloha Tower Associates, meanwhile, sued Mitsui in May, saying the lender reneged on more than $600 million in financing.

The deal's demise also represents a setback for the state, which has negotiated for several months with the prospective buyer over new lease rents. An attorney for the Aloha Tower Development Corp., the state agency that oversees the project, declined comment today.

Dowling's group includes officers of Maui-based Goodfellow Bros. and Albert C. Kobayashi construction firms.