LONDON (Reuters) -Britain's Thames Water said U.S. private equity firm KKR had pulled out from a plan to invest billions of pounds into the embattled utility, putting its fight to avoid financial collapse back into focus.

The company, which is Britain's biggest water supplier with 16 million customers, has been struggling with huge debts, and was banking on KKR investing over 3 billion pounds of new equity to keep it operating.

"KKR has indicated that it will not be in a position to proceed," Thames Water said in a statement on Tuesday.

Chairman Adrian Montague said on Tuesday that the development was "disappointing" and that the company would now proceed with discussions with senior creditors', who have put forward their own alternative plan for the company.

Thames Water could face temporary government nationalisation if it fails to recapitalise.

The company is at the centre of a public backlash against the water sector which is blamed for polluting Britain's river and seas while also hiking bills.

An overhaul of the way the industry is regulated was proposed by a government-commissioned review in its interim report published on Tuesday.