Apple has given Imagination Tech notice that it will stop using its graphics technology in the iPhone and other products in up to two years' time, dealing a major blow to the British company, which could lose half of its revenue.
Shares in Imagination, in which Apple holds an 8 per cent stake, plunged by 65 per cent.
Imagination said Apple, its biggest customer, was developing its own independent graphics processing chips, which would reduce its reliance on the company.
The technology group licences its processing designs to Apple and receives a small royalty on every graphics chip used in an iPhone, iPad and Apple Watch.
Imagination, however, said it doubted that Apple could go it alone without violating Imagination' patents, intellectual property and confidential information.
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"This evidence has been requested by Imagination but Apple has declined to provide it," it said on Monday.
It said Apple's notification had triggered talks on alternative commercial arrangements for the current licence and royalty agreement.
Apple paid Imagination licence fees and royalties totalling 60.7 million pounds for the year to end-April 2016, half of its total revenue, and is expected to pay about GBP65 million ($A107 million) for this year, Imagination said.
