The consortium led by BA and TPG, a Texas private equity group, withdrew its offer for Iberia Airlines.
In a statement the consortium said: "As a consequence of the recent decision taken by Iberia's core shareholders, the consortium formed by British Airways, Ibersuizas, Quercus, TPG and Vista Capital, has come to the conclusion that it is not possible to pursue a potential takeover bid since the consensus and friendly terms that we considered essential for this Project are no longer in place.
"We have thus decided unanimously to withdraw our indication of interest for the Company."
The withdrawal came after BA which owns 10% of Iberia, declined to exercise options to buy up 7% of the airline's shares from BBVA, a Spanish bank, and 6.3% from Logistica, part of the Altadis tobacco group.
The shares were bought by Caja Madrid, a Spanish savings bank, which consequently increased its holding in the airline from 10% to 23.3%.
This is the largest individual shareholding and would enable the bank to block any bids.
Caja Madrid also indicated that it wanted the national airline to stay in Spanish hands.
The BA/TPG consortium had offered 3.4bn for the airline, about 3.60 a share.
After carrying out due diligence on Iberia's books, the consortium was understood to be ready to make a firm offer within weeks.
A Madrid-based investment fund Gala Capital has indicated that it will make a bid of around 3.60-3.90 a share but has so far not done so.
Air France-KLM and Lufthansa are also thought to be circling. A European agency reported this week that Air France was ready to make a 3.60 per share bid next March after the Spanish general elections.
The airline declined to comment.
Its chairman Jean-Cyril Spinetta has always said he would only consolidate a new carrier into the group if it were profitable to do so.
Lufthansa has consistently said the price for Iberia was too high and comments by the airline's ceo Wolfgang Mayrhuber to a German newspaper this week suggest he may be more interested in bidding for the deeply trouble Alitalia.
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