The withdrawal was blamed on Carillion’s “wholly unexpected decision” to insist that Balfour’s US business Parsons Brinckerhoff was included in the deal.
The two sides had previously agreed to start merger discussions on the basis that Balfour continues with previously announced plans for the sale of Parsons, a business it bought for £380m in 2009.
Shares in Balfour and Carillion were around five per cent lower today, having surged in recent days on hopes that the two companies will agree a £3.4bn tie-up.
The discussions, which were disclosed last week, followed an initial approach from Carillion with Balfour struggling after a series of profits warnings and the departure of chief executive Andrew McNaughton.
Balfour, which was founded in London by George Balfour and Andrew Beatty in 1909, built the aquatics centre at the London 2012 Olympics site and in 2011 completed the painting of the Forth Bridge rail crossing.
It has been rocked by project delays and contract disputes at its Cheadle-based engineering services business, which has been the source of the recent profit downgrades.
Wolverhampton-based support services firm Carillion employs more than 40,000 people worldwide, with established businesses in the UK, Canada, the Middle East and North Africa, and annual revenues of more than £4bn.
Carillion traces its history back to the companies that became part of the Tarmac Group by the late 1990s, including Wimpey Construction.
In 1999, Tarmac split into two as it created a separate company focused on support services and construction, which was Carillion. Since then the company has acquired firms including Mowlem and Alfred McAlpine.
Projects involving Carillion have included the Olympic Media Centre and the Channel Tunnel Rail Link to St Pancras. It recently won the contract to redevelop Liverpool’s Anfield stadium.