The biggest US-based drugmaker, Pfizer, and rival Allergan have called off the record $US160 billion ($A212.3 billion) merger "by mutual agreement".
Pfizer cited the US Treasury Department's new regulations, issued late on Monday, that make such "tax inversions" less lucrative.
The aggressive new rules have succeeded in blocking Pfizer from acquiring Allergan and moving to Ireland - at least on paper - to reduce its tax bill.
The merger would have moved Pfizer's address, but not its operations or headquarters, to Ireland, where it would pay far less in corporate taxes.
Pfizer, based in New York, has agreed to pay Dublin-based Allergan $US150 million for reimbursement of expenses.
Now the two drugmakers will focus on other strategies to boost profits and sales quickly, with Pfizer saying it will decide by year's end whether to separate its global established products business, which sells older, mostly off-patent drugs.
Pfizer has endured years of relentless pressure from analysts and others to break up the company so growth and profits could accelerate.
"We remain focused on continuing to enhance the value of our innovative and established businesses," Pfizer CEO Ian Read said in a statement.
"We believe our late-stage pipeline has several attractive commercial opportunities with high potential across several therapeutic areas," Read added.
"We also maintain the financial strength and flexibility to pursue attractive business development and other shareholder-friendly capital allocation opportunities."
Allergan's CEO, Brent Saunders, said in a statement that his company is "disappointed that the Pfizer transaction" won't happen, adding that "Allergan is poised to deliver strong, sustainable growth".
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