LSE shares fell 9.32% to 487.75 pence on the news, well below Deutsche Börse's conditional offer of 530 pence per share which the UK exchange has twice rejected.

Deutsche Börse says the decision was a result of the board of the LSE not recommending its proposal, and of discussions it held with its shareholders. But the German exchange says it reserves the right to bid for the LSE again if its Paris-based rival Euronext or another third party makes an offer.

The Börse has been facing increasing opposition to its takeover plans from shareholders which called on the exchange to drop the plan and buy back its own shares instead. One of those rebels, US-based Atticus Capital, which holds 5.6% of Deutsche Börse shares, told the Financial Times that the move to withdraw the bid was "a great decision for shareholders".

But in a statement, Werner Seifert, CEO of Deutsche Börse, says: "We believe the proposed transaction would have been value enhancing for Deutsche Börse shareholders. At the same time, we recognise that a significant portion of our shareholder base is focussed on return of capital in the short term."

Deutsche Börse has agreed to meet the demands of the rebel shareholders and says it will now work on a plan for "a significant distribution of funds to shareholders" in addition to the suggested dividend for 2004.

But the decision to ditch the bid leaves Seifert in a weakened position. He first attempted to take over the LSE four years ago but the deal was scuppered by London shareholders - at the time LSE was owned by its members - and a hostile bid from Nordic stock exchange operator OM Group. So far the Börse has dismissed speculation that this lastest failure will result in his resignation.

LSE has yet to comment on the news, but according to press reports, the board of the London exchange will meet today to review its options.

Deutsche Börse's withdrawal leaves Pan-European exchange operator Euronext as the only suitor for the London exchange. Euronext revealed details of its proposed bid for the LSE last month, but has still not disclosed what it would be prepared to pay for the UK market operator. Euronext shares were up 4.04% to EUR29.64 in morning trading.