Fiat Chrysler (FCA) had last week proposed a "merger of equals" with the French group that would create a global auto giant spanning the United States, Europe and Japan.
The plan was welcomed by financial markets and given a conditional green light by the French government, which nonetheless warned against "any haste" regarding the proposed 50/50 merger.
But FCA said on Thursday that while it "remains firmly convinced" of the deal's advantages, "political conditions do not currently exist in France to carry out such an arrangement".
Renault announced earlier that its board of directors had not reached a decision following a crucial meeting held at the request of the French state, the biggest shareholder in Renault with a 15 percent stake.
French Finance Minister Bruno Le Maire had called a merger that would have brought together the flagship brands as well as Alfa Romeo, Jeep, Maserati, Dacia and Lada, "a real opportunity for the French auto industry".
It would have created a group worth more than 30 billion euros, producing 8.7 million vehicles per year.
Le Maire had set conditions however, including that no plants be closed as part of the tie-up and that a Renault-Nissan alliance be preserved.
A source close to Renault said Le Maire had asked for a board meeting next Tuesday after he returns from a trip to Japan where he was to discuss the proposal with his Japanese counterpart.
On Wednesday, all Renault directors favoured the merger, apart from an employee's representative affiliated with the powerful CGT union and two from Nissan, a long-time Renault partner, who abstained, the source added.
A little more time
The two directors appointed by Nissan asked "to write in the minutes that they would say yes with a little more time" however.
Le Maire said on Thursday he had "taken note" of the FCA decision.
But a source close to the French finance ministry went further, saying the government "regrets the hasty decision of FCA."
"From the beginning, the [French] state has wanted the necessary time to examine" the deal. "Despite significant progress, a short delay was still necessary so that all conditions set by the state could be met."
Renault holds a 43-percent stake in Nissan, which saw its shares tumble after the withdrawal was announced.