Tanya Beckett: The breakdown leaves both likely targets for other merger partners

In a statement, the former building society said that the original merger terms were no longer acceptable to the board of the Bank of Ireland.

If the deal had gone through, it would have created the UK's eighth largest banking group.

The two partners had estimated that the merger would generate annual cost savings of £200m.

Phil Middleton of KPMG explains why they called it off

In February, Alliance & Leicester announced that pre-tax profits for 1998 had reached £455m, up from £395m the previous year.

And in May, Bank of Ireland reported pre-tax profits for the year to 31 March of £694m, up from £444m in the previous year.

The jump included a one-off gain of 218 million euro (£144m) from the sale of its Citizen Financial business in the US to Royal Bank of Scotland.

Unacceptable terms

On Wednesday however a statement from the A&L said: "In the course of negotiations, however, it has become clear that ... the terms are no longer acceptable to the directors of the Bank of Ireland.

"As a result, they have requested changes to key items which had previously been agreed.

"Since Alliance & Leicester's business will not benefit from a prolonged period of uncertainty the board has unanimously decided to bring the discussions to a close."

The former building society said it would resume its share buy-back programme and added that it anticipates "another strong set of results" at the interim stage, with "further growth in earnings per share and the delivery of significant cost reductions."

Earlier this week newspaper reports suggested that the Bank of Ireland was concerned about conceding management control to the A&L as part of the merger deal.

A&L shares closed down 2.1% at 875p on the news.

Michael Trippitt of Schroders said he was not entirely surprised that the merger talks had been called off.

"The body language suggested there was no meeting of minds. I don't think it's a regulatory issue, I think it's a management issue.

"It does suggest that these mergers are tougher to deliver than expected."

Merger mania

John Windeler, group chairman at Alliance & Leicester, said the company was still committed to a policy of expansion through acquisitions or mergers.

But although the European banking sector has been undergoing consolidation, cross-border mergers have proved difficult.

Instead, banks in France, Italy and Spain have been trying to merge with each other.

Most analysts expect the UK banking sector to follow the same trend, with some of the medium size banks the most vulnerable.

The merger between the A&L and the Bank of Ireland would have been the first cross-border merger between banks where one country was a member of the euro-zone, and the other one was not.