Deutsche Bank and Commerzbank have abandoned merger talks, saying the deal would have been too risky.
Both banks said the deal would not have generated “sufficient benefits” to offset the costs of the deal.
The German banks only entered formal merger talks last month.
The German government had been supporting the tie-up, with reports saying Finance Minister Olaf Sholz wanted a national champion in the banking industry.
The government still owns a 15.5% stake in Commerzbank, acquired after the bank was bailed out following the financial crisis.
The deal was seen as a way of reviving the fortunes of both banks.
Deutsche Bank shares fell 1.5% to €7.48 each, while Commerzbank shares dropped 2.5% to €7.60.
Combined, the banks would have controlled one fifth of Germany’s High Street banking business with €1.8 trillion ($2tn; £1.6tn) of assets, such as loans and investments.