Italian-American carmaker Fiat Chrysler on Thursday said it had withdrawn a proposal for a merger with Renault, saying it would be unable to reach an agreement with the French government.
Fiat Chrysler (FCA) "remains firmly convinced" of the interest of its offer but "political conditions do not currently exist in France to carry out such an arrangement", it said in a statement.
French automaker Renault announced earlier that its board of directors had not reached a decision following a crunch meeting held at the request of the French state, the biggest shareholder in Renault with a 15 percent stake.
Fiat Chrysler proposed a "merger of equals" with Renault last week which was welcomed by financial markets and had been given a conditional green light by the French government, although it warned against "any haste" regarding the proposed 50/50 merger.
French Finance Minister Bruno Le Maire had said a merger, which would have brought together the flagship brands as well as Alfa Romeo, Jeep, Maserati, Dacia and Lada, would be "a real opportunity for the French auto industry".
However, he had set various conditions, including that no plants be closed as part of the tie-up and that the Renault-Nissan alliance continues.
A source close to Renault said Le Maire had asked for a board meeting next Tuesday after he returns from a trip to Japan where he will discuss the proposal with his Japanese counterpart.
At Wednesday evening's board of directors vote at Renault's headquarters near Paris, all the directors were for the merger, apart from a representative of employees affiliated with the powerful CGT union and two representatives of Nissan — a long-time Renault partner — who abstained, the source added.
The two directors appointed by Nissan, however, asked "to write in the minutes that they would say yes with a little more time".
Fiat Chrysler said: "FCA remains firmly convinced of the compelling, transformational rationale of a proposal that has been widely appreciated since it was submitted, the structure and terms of which were carefully balanced to deliver substantial benefits to all parties.
"However it has become clear that the political conditions in France do not currently exist for such a combination to proceed successfully."
Renault holds a 43-percent stake in Nissan, whose stocks tumbled 2.64 percent to 742.7 yen on Thursday after the withdrawal was announced.
Relations in the partnership have been under strain since the arrest last November of former boss Carlos Ghosn, who is awaiting trial in Japan over charges of under-reporting his salary for years while at Nissan and using company funds for personal expenses.
The merger would have created a group worth more than 30 billion euros, producing 8.7 million vehicles per year.
The combined mega-group — including Nissan and Mitsubishi — would be by far the world's biggest, selling some 15 million vehicles, surpassing Volkswagen and Toyota, which sell around 10.6 million each.
Foreign takeovers of major French firms are highly controversial and successive governments have sought to defend domestic industrial groups which are seen as important for their technology or jobs.