Lockheed said it had been unable to reach a deal to ease government concern about competition in the industry.

Lockheed Martin chairman and chief executive Vance Coffman said: "Our inability to reach an acceptable solution, combined with our concern over the litigation with our principal customer (the Pentagon), necessitates this decision.

"Continuing the litigation at this point is simply not in the best interests of Lockheed Martin's customers, shareholders or employees."

Mr Coffman said Lockheed would continue its "strategy of strengthening our position in the global marketplace."

Northrop Grumman's James Hart: 'The company will continue as a strong independent competitor'

Northrop Grumman said it had been informed of the decision by Lockheed.

Chairman, president and chief executive Kent Kresar said, "While we believed the merger was in the best interests of our constituencies, Northrop Grumman can and will continue as a strong, independent competitor in the aerospace marketplace."

Failure to convince

The merger, announced a year ago, would have been worth around $13bn.

The deal would have been worth around $13bn

It has been opposed by the Justice Department which filed suit in March to block the alliance on grounds that it would stifle competition.

The US Defence Department said it was also prepared to go to court to block the plan.

US Secretary of Defence William Cohen denied that there was a change in US policy. He told reporters that the US still favoured consolidation in the defence industry but."they have to be consolidations that are consistent also with maintaining the strong belief that we have that we must maintain competition.".

The two companies had insisted that their alliance would not hurt competition and that it would instead lead to savings for the taxpayer of $1bn a year.

They had agreed to sell off up to $1bn worth of business to calm government competition worries.

But they rejected reported demands by the Justice and Defence Departments that they give up electronics units responsible for business worth $4bn as "excessive".

Government welcomes move

Justice Department anti-trust chief Joel Klein welcomed the move to call off the merger, saying both his own department and the Defence Department were firmly opposed to the deal.

Mr Klein said the move meant "the United States government and the American people will continue to receive the highest possible quality of military products and services in defence of this nation, at the lowest possible cost to the American taxpayer."

Lockheed Martin was formed by the merger of Lockheed and Martin Marietta. The company builds the F-16 fighter and has orders for the new F-22 fighter, as well as producing missles, defence electronics, and space systems.

With headquarters outside Washington in Bethesda, Maryland, Lockheed has 173,000 employees, and major production facilities in half a dozen states, including California and Texas.