IAG entered into discussions with Air Europa in November 2019 over a potential €1 billion acquisition.
The fee was reduced to €500 million in January 2021 owing to the effects of the Covid crisis on Air Europa.
The group said a move for the Madrid-based carrier would allow it to create a hub in the Spanish capital to rival Heathrow, Schiphol and Charles de Gaulle.
It was also hopeful it would strengthen its market position on routes to Latin America and the Caribbean.
The proposed acquisition, though, attracted the attention of European competition authorities last summer, who raised concerns the deal would affect competition on both domestic and international routes.
Last month, the UK’s Competition and Markets Authority launched its own investigation into the likely effects of the deal.
On Wednesday morning (15 December), IAG confirmed it planned to walk away from the negotiations.
In a statement, the group said: "International Airlines Group and Globalia today confirm that discussions are at an advanced stage to terminate the agreement signed on 4 November 2019 and amended on 20 January 2021 under which IAG’s subsidiary, Iberia, had agreed to acquire the entire issued share capital of Air Europa.
"A further update will be made in the future, as appropriate."
