Britain's business department said on Wednesday the proposed merger of BAE and EADS had commercial logic of but only if it met the interests if all parties.
The department said both firms would continue to be successful independent companies with a presence in Britain despite the collapse of the deal.
"BAE Systems and EADS have decided today not to proceed with the proposed merger. The two companies will remain as successful independent companies, each with a significant presence in the UK," it said in a statement.
"The government has always been clear that it could see the commercial logic of this deal but that it would only ever work if it met the interests of all the parties involved," it added.
(Reporting by Mohammed Abbas; editing by Guy Faulconbridge)