"In view of the complexity of the topic, it seems impossible to produce a plan that reflects the interests of all parties," Commerzbank said in a statement. The bank added the strategic objectives of the two banks weren't far apart, but "a critical assessment of the pros and cons of a merger ultimately failed to yield a convincing perspective."

Commerzbank Chairman Martin Kohlhaussen said at a news conference that the "real value added of a merger can't be achieved." The bank said both Dresdner and Commerzbank are now free to consider other options.

"Commerzbank will primarily concentrate on strengthening its European links and will implement organizational measures" to expand in Internet operations, as well as expanding as an investment bank, it said.

A meeting Tuesday among the three parties ended without agreement on the most difficult issue, the valuation of a deal, according to people familiar with the matter. Allianz, which owns 22% of Dresdner, supported Dresdner's view that Dresdner shareholders should get close to 60% of the combined bank, these people said.

The two Frankfurt banks, Germany's third and fourth largest, had been exploring a merger that would have created a combined company valued at more than 40 billion euros ($37.53 billion), with the necessary scale and profitability -- they hoped -- to play a lead role in European banking consolidation.

But their talks ran into several problems, including the question of how to determine fair value for a stock swap, how to combine operations with Allianz in asset management and insurance, and what to offer Commerzbank's existing insurance partner, Assicurazioni Generali SpA of Italy, which is a rival to Allianz.

Commerzbank Chairman Martin Kohlhaussen and Mr. Fahrholz met with Allianz's top two executives in Munich on Tuesday afternoon. At the meeting, Allianz, represented by Chairman Henning Schulte-Noelle and CFO Paul Achleitner, conducted a "charm offensive" in an attempt to calm Commerzbank's fear that Allianz was pressing for too many concessions, a person familiar with that meeting said.

At a previous meeting with Allianz, held in Munich last Friday, Messrs. Kohlhaussen and Fahrholz were asked about their merger strategy by Messrs. Schulte-Noelle and Achleitner. The latter pair told the two Frankfurt bankers that from Allianz's perspective -- as a financial investor in Dresdner and a strategic partner to the possible merged bank -- the merger plan wasn't yet good enough. The men from Allianz advised the bankers that more homework was needed before shareholders and investors would warm to the deal.

Shares in Dresdner and Commerzbank have fallen since June 16, the day before merger talks began. Analysts and investors have become skeptical in recent years about the benefits of merging banks with matching business actiities, deals in which synergies are largely confined to cutting overlapping costs. For this reason, Dresdner and Commerzbank -- whose activities overlap heavily -- pitched their merger as a way to increase revenue, not just a means to cut costs.

Separately, Dresdner Bank on Wednesday said first-half net profit fell to 420 million euros from 507 million euros in the year-earlier period. The bank cited an extraordinary charge of 478 million euros to improve competitiveness, and a restructuring charge of 250 million euros to boost productivity of the domestic distribution network.

First-half pretax profit excluding one-time charges rose to 1.43 billion euros from 880 million euros a year earlier. Risk provisions for the first half were 546 million euros, up from 430 million euros. Dresdner didn't provide a forecast for second-half activity.

-- The wall Street Journal