Airtours took the decision last night after taking the view that it would not be able to satisfy the competition concerns of the regulatory authorities before the 24 June deadline stipulated by the bid timetable.
The European Commission had ruled last Friday that it would press ahead with a full-scale, four-month investigation into the takeover. It had expressed concerns over the dominant position held by the major travel firms in the UK package holiday market.
Airtours would not comment on the decision to lapse the bid. However, it is thought that after consultation with the European Commission over the last few days it had become clear that Airtours would not be able to make any necessary concessions, such as selling the First Choice airline Air 2000, in time.
First Choice will now have 21 days in which to persuade its shareholders to accept its merger with Kuoni, which has already won regulatory clearance.
Investors have given the deal a lukewarm reception so far. But First Choice will argue that the certainty of the Kuoni deal is more attractive than hanging on in the hope that the Airtours bid is waived through by Brussels.
Other bidders could enter the fray at this point. But First Choice was playing down this possibility when it reported its half-year results earlier this week.
Airtours, whose bid has won more than 51 per cent acceptance from First Choice shareholders, has not ruled out coming back with a fresh offer should its bid eventually win clearance.
The First Choice-Kuoni deal would represent a more welcome outcome for Thomson Travel. It would have lost its number one position in the UK holiday market if Airtours had won.
Thomson has pledged to add a million extra holidays to its capacity over the next two years as well as launch a budget holiday brand in an attempt to maintain its lead position.
It is likely to reduce the number of holidays back to the previous level if the Kuoni deal goes through.
If Airtours does lose the battle it would be the second time that David Crossland, its chief executive, has failed to win control of his main rival.
Airtours bid for the company in 1993 when First Choice was called Owners Abroad. That deal foundered when Thomas Cook agreed to take a 10 per cent blocking stake.
Airtours is due to announce its interim results today. It is expected to show losses of pounds 26m-pounds 29m in the traditionally loss-making first half.
First Choice announced increased first-half losses earlier this week but buoyant figures on current trading.