The company had offered Û200m (pounds 138m) for a stake in three factories owned by Bulgatabak, the state-owned monopoly. With Bulgaria due to join the European Union in 2007, its tobacco market will soon be open to competition. BAT hoped to steal a march on its rivals by taking a stake in the monopoly before Bulgaria's accession.
A spokeswoman for BAT said: "In the difficult political environment, which continues to worsen, we do not believe we can complete the transaction to a timescale that will ensure we make a worthwhile return on our investment."
The Bulgarian government's attempts to sell Bulgatabak have been thwarted by the junior party in its coalition group. The Turkish Movement for Rights and Freedoms opposed the sell-off to BAT, concerned that the state monopoly was transferring to private hands.
Most workers in the tobacco industry are Turkish, and there were fears they would suffer from the takeover. A spokesman for Bulgaria's Ministry of the Economy said: "The coalition partners couldn't reach agreement on the issue."
The Bulgarian fiasco follows embarrassment over BAT's plans in China. It is another area of huge potential and BAT announced in July it had approval to invest. The Chinese state tobacco authority, however, has since said it will not allow any new foreign companies into its tobacco market. Negotiations with the Chinese authorities continue.Reuse content