Federal-Mogul, one of the world's largest car-parts makers, indicated it would not increase its informal pounds 3.6bn cash and paper offer for the UK group. In a short statement, the Detroit-based company said that it had "withdrawn its interest in acquiring LucasVarity". It added that, after poring over Lucas' books for a week, Federal-Mogul decided that a takeover "would not clear its financial hurdles".
The company declined to comment further but analysts said that Federal- Mogul did not have the firepower to match TRW's all-cash agreed bid.
They said that the company's overstretched balance sheet had probably deterred the company's Wall Street backers from bankrolling the counterbid.
Dick Snell, the group's ambitious chief executive, embarked on an acquisition spree last year that increased Federal-Mogul's sales from $1bn to $7bn. However, the string of purchases, including the pounds 1.5bn takeover of the UK brake-pads group T&N, left the company with a debt mountain which made it difficult to raise additional cash.
One analyst praised Mr Snell's decision: "If you can't make it, it's better to pull out." He added that an expensive bid ding war with TRW could have jeopardised Mr Snell's "big, hairy audacious goal" of $10bn sales by 2002.
The withdrawal of Federal-Mogul clears the way for a TRW takeover of Lucas to create a world leader in the production of brakes, steering systems and defence components, with sales of around $19bn. The deal would see the disappearance of both Lucas' London listing and its transfer to the US, three months after a plan by its chief executive Victor Rice to move to the States as an independent company was defeated by shareholders.
Analysts said it was unlikely another counterbidder would emerge and predicted that Lucas shareholders would accept the 288p a share offered by TRW.