State-rescued Royal Bank of Scotland said Friday that Spanish lender Santander had withdrawn from a £1.65 billion ($2.65 billion, 2.05 billion euros) deal to buy 316 of its British branches.
"It is of course disappointing that Santander decided to pull out of this transaction," said RBS chief executive Stephen Hester in a statement.
Santander had agreed in August 2010 to buy the branches as part of penalties set by the European Commission after RBS received a huge state bailout during the global financial crisis.
The deal included RBS-branded branches in England and Wales, NatWest branches in Scotland and the accounts of some small and medium-sized business customers. It had been expected to conclude this year.
"Santander's decision follows extensive work by both parties to separate the business into a largely standalone form and to prepare the business, customers and staff for transfer," the statement said.
"RBS is determined that the decision will have no impact on the service available to customers and will continue to work to fulfil its obligations to the European Commission."
The European conditions require cuts to RBS' branch network by the end of 2013.