Barclays has dropped its bid for ABN Amro, clearing the way for a group led by the Royal Bank of Scotland to buy the Dutch bank.
The deal will create one of the world's largest banks
The bank confirmed it would withdraw from the bid battle after it failed to win the backing of shareholders controlling 80% of ABN's shares.
Experts believed the 71bn euro (£49bn; $98.5bn) RBS offer would prevail, since it has a much larger cash element.
Despite the setback, Barclays said its business still had "strong momentum".
Its chief executive John Varley said he was "disappointed" by the outcome but upbeat about the company's future.
"I have complete confidence in the independent future of Barclays," he said.
Nevertheless, the failure to pull off the deal - Europe's largest banking takeover - will inevitably raise question marks about Barclays' future strategy.
Barclays' shares rose marginally after the widely-expected announcement while shares in RBS fell on concerns about the price it is paying to conclude the deal.
The deadline for ABN investors to accept or reject the RBS-led bid passes on Friday and the bank is expected to reveal in the next few days what level of support it has received.
However, analysts now believe its victory is all but assured.
Royal Bank of Scotland is set to emerge victorious
The value of Barclays' bid, which was predominantly share-based, fell in recent months as global credit worries dented the market value of banking companies.
Its offer was worth more than 10bn euros less than the RBS led bid.
ABN's management initially threw its weight behind the Barclays bid, but later withdrew its support, calling for a "level-playing field" between both bidders.
The RBS consortium includes Belgian-Dutch bank Fortis and Spanish firm Grupo Santander.
Shareholders in Barclays and Royal Bank of Scotland both backed their respective bids.
But some investors are known to be worried about the huge expense of the deal at a time when the outlook for global financial markets is uncertain.
In the event of the RBS bid winning out, it is expected that ABN's business will be split up.
The bid battle has dragged on for most of the year after a legal row over the fate of LaSalle, ABN's US subsidiary.
ABN's decision to sell LaSalle to Bank of America was challenged by a Dutch shareholders' group, but its action was upheld by a Dutch court.