The San Francisco Art Institute, a legendary institution teetering on the brink of insolvency, said it will shut down after the University of San Francisco backed out of an acquisition deal that was seen as a financial lifeline for the 151-year-old art college and its cornerstone campus on Russian Hill.

A statement issued by the office of USF President Paul Fitzgerald said that the university had “informed SFAI leadership that it would not enter into a definitive agreement with SFAI due to business risks that could impact USF students, faculty, and staff.”

It also said that USF would expand its own art school instead.

In a separate statement, the Art Institute announced Friday that it was “no longer financially viable” and that it had “ceased its degree programs” as of Friday.

“SFAI will remain a nonprofit organization to protect its name, archives, and legacy.” The future of its Chestnut Street campus has not been determined but it will maintain its Diego Rivera mural, the school’s chief asset.

USF’s announcement Friday puts an end to what would have been an unusual combination between two of the oldest institutes of higher learning in the Bay Area. USF was founded as a Jesuit university in 1855 and the Art Institute (formerly the California School of Fine Arts) in 1871.

A possible merger of the two had been discussed for years and appeared to be on track in January when each of the universities “signed a letter of intent to explore integrating operations and academic programs in the arts to elevate the next generation of artists,” according to a statement released by USF and SFAI. The plan was for “integrated operations” to start this fall.

“We believe (the merger) would be a tremendous benefit to the Bay Area, the nation, and the world,” John Nicolai, chair of the USF board of trustees, said at the time. “Together, the two institutions would create a premier arts curriculum, with an intensive studio environment and a vital liberal arts education.”

As part of the deal, USF would have acquired the Art Institute’s historical buildings, art and film collections and other assets, university officials said, including the Anne Bremer Memorial Library, the Diego Rivera Gallery, exhibition space, studios, photo and film labs and a rooftop amphitheater.

But it was something not included in the proposed deal that may have been the insurmountable element — the land under the campus. It is a half square block of prime hillside real estate with bay views. But it was donated by a benefactor in a complicated trust that deeds it to UC Berkeley in the event that it is no longer used as an art campus.

Also mentioned as reasons to cancel the plan were the Art Institute’s financial status, disappointing enrollment projections and costs of bringing the main Chestnut Street campus up to code and meeting ADA compliance.

“While disappointed by this outcome with SFAI, we remain committed to strengthening opportunities for our students and faculty to explore the fine arts within the context of Jesuit education,” Fitzgerald said.

The announcement came just days after the Art Institute held what will likely be its last graduation ceremony, concluding its summer session. It also graduated a class last spring. But the academic program for the fall semester had already been canceled before the deal with USF unraveled. It is not known if applications will be accepted for the spring 2023 semester or any after that.

This marks the second time a proposed merger between the Arts Institute and USF has fallen through. The first collapse came in 2020 when talks fell apart even as the Art Institute was celebrating its 150th anniversary. Then-president Gordon Knox was let go, as were 69 adjunct faculty members, comprising the majority of the teaching staff. The 16 tenured faculty were put on notice that they would be laid off.

The student body, once as large as 700, had dwindled to 300 and those were advised to seek transfer. The Fort Mason campus was offered for sublease, with 50 years remaining on a 55-year master lease.

Sam Whiting is a San Francisco Chronicle staff writer. Email: swhiting@sfchronicle.com Twitter: @SamWhitingSF