Suez has pulled out of the race for British Energy, the nuclear generator, dealing a fresh blow to government hopes of a competitive auction for the company.

The French industrial group said yesterday that its priority would be to complete its merger with Gaz de France and that it had chosen to terminate discussions over the British company to focus on this.

“Accordingly, Suez confirms that, in its discussions regarding the future development of the nuclear energy sector in the UK, those relating to a potential offer for British Energy have now ceased,” the utility said in a statement.

Suez noted that UK takeover rules would keep the French company from resuming discussions relating to British Energy for another six months.

The announcement leaves only two serious bidders in the running for British Energy: EDF, of France; and a consortium including RWE, of Germany, and Iberdrola, of Spain.

Two other British groups, Centrica and Scottish and Southern Energy (SSE), have also expressed an interest - most likely to acquire parts of British Energy - but are not thought to be credible bidders on their own.

British Energy holds its preliminary results briefing next week but is not expected to make any comment on the progress of the takeover talks.

The retreat of Suez leaves EDF, the state-controlled power giant, as the front-runner in negotiations to take over British Energy, which effectively has been put up for auction by the Government, which has a 35 per cent stake in the group.

Sale of the Government's stake would automatically trigger a bid for the whole company.

British Energy operates eight nuclear facilities and one coal-fired plant, which generate one sixth of UK electricity.

British Energy confirmed last week that it had received three approaches, two of which valued the company at close to £11 billion. The second is thought to have come from the Spanish and German consortium.

Discussions between the bidders and British Energy, which is being advised by NM Rothschild, are expected to continue for several weeks. However, the Government is thought to be keen to wrap up the negotiations before the House of Commons goes into its summer recess in July.

The sale of British Energy is expected to kick-start plans for a new generation of nuclear reactors, for completion after 2018, because British Energy owns some of the most suitable sites in the UK for the construction of nuclear plants.

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