* U.S. Justice Dept says deal would harm competition
* KLA-Tencor's stock down 4 pct in extended trading
* Lam Research's shares fall 1.2 pct (Adds background on chip sector deals, U.S. Justice Department comment)
Oct 5 (Reuters) - Semiconductor equipment maker Lam Research Corp on Wednesday terminated its $10.6 billion deal to buy rival KLA-Tencor Corp after the U.S. Department of Justice told the companies it had serious concerns that the deal would harm competition.
Shares of KLA-Tencor were down about 4 percent at $68.60 in extended trading, while Lam Research's shares fell 1.2 percent to $95.00.
Lam Research agreed to buy KLA-Tencor for $67.02 per share last year, amid a wave of consolidation in the chip industry.
Together, the companies would have commanded a 42 percent share of the wafer fabrication equipment market.
U.S. government agencies have been wary that a further reduction in the number of suppliers in the semiconductor industry would drive up prices and perhaps curb innovation.
Last year, U.S.-based Applied Materials Inc was forced to scrap its $10 billion takeover of Japanese chip-making gear rival Tokyo Electron Ltd after the deal fell foul of U.S. antitrust regulators. (reut.rs/2dfWVHy)
The latest deal "presented concerns about the ability of the merged firm to foreclose competitors' development of leading edge fabrication tools and process technology on a timely basis," said Renata Hesse, Acting Assistant Attorney General of the Justice Department's antitrust division. (bit.ly/2dfV3hQ)
Lam Research and KLA-Tencor had cautioned in August that a regulatory clearance for the deal may not be obtained.
The companies said on Wednesday they now plan to explore collaboration opportunities around programs that would be beneficial to their customers.
Both Lam Research and KLA-Tencor count Samsung Electronics Co Ltd and Taiwan Semiconductor Manufacturing Co Ltd (TSMC) as major customers.
KLA-Tencor also raised its quarterly dividend by 2 cents to 54 cents per share.
Up to Wednesday's close, Lam Research's stock had risen 21.1 percent this year, while KLA-Tencor's had increased about 3 percent. (Reporting by Narottam Medhora and Ankit Ajmera in Bengaluru; Editing by Don Sebastian and Bill Rigby)