A deal was expected to raise upwards of pounds 700m, all but eliminating the group's debt, which stood at pounds 579m at the time of the interim results in June.
But after informal soundings, Warburg was unable to secure the necessary institutional support. At a tense board meeting on Wednesday, Warburg told the directors that, based on their pre-marketing, investors might have been prepared to pay no more than the equivalent of pounds 550m for shares in the business. The Lonrho board were aghast at the consequences that may flow from the cancellation.
Martin Bolland, chief executive of the Princess Metropole business, was told of the decision shortly before he was due to make a presentation to institutions at the London Metropole on Wednesday.
On Thursday, Lonrho said the flotation had been postponed after the conglomerate had received approaches from "a number of parties" interested in acquiring all or part of the business. Mr Bolland is understood to be dismayed at what he sees as a lack of communication from Lonrho's chief executive, Dieter Bock.
Analysts were surprised by the development. They said Warburg may have encountered a weak response from investors because of its involvement in the Jarvis Hotels flotation in July, which has left investors with a sour taste.
Jarvis was priced at the top end of its range, at 175p, and was heavily oversubscribed. But shortly after the issue, Candover, the venture capital group, sold 41.5 million shares in the business. After that, the shares slumped from just over 180p to 156p. Institutions blamed Warburg for the losses they are nursing.
There are also concerns that the Princess Metropole deal was carried out in a rush, partly with the aim of beating the pounds 1bn-plus Thistle Hotels deal, which is expected to hit the market in October.
Lonrho now says it will proceed with the trade inquiries it has received. A spokesman said that eight firm expressions of interest had been whittled down to a shortlist of five.
Metropole would be an attractive target. Its five hotels, in London, Birmingham, Brighton and Blackpool, are rare for their size. The average number of rooms, 455, is well above most hotels in the UK. It concentrates on the business market, with conferences an important feature.
Stakis has been mentioned as a possible buyer, although this would require a funding exercise.