Soaring fuel prices, falling passenger numbers and fears over competition rules have forced Thomas Cook and Air Berlin to scrap their proposed airline merger.

Thomas Cook said it was already considering alternative options for Condor, and industry sources believe the airline could become involved with merger talks between rivals TUIfly and Lufthansa's Germanwings.

The tour operator was to have sold its loss-making carrier to Air Berlin and taken a 30 per cent stake in the merged entity.

It said yesterday that it and Air Berlin had withdrawn an application for merger approval from the German Bundeskartellamt, the equivalent of the Office of Fair Trading.

When the deal was announced last September, Thomas Cook said it would receive between €380 million (£303 million) and €475 million in Air Berlin shares plus €120 million in cash.

The German cartel office has been considering the merger for nine months and had asked for extra time to revisit certain aspects of the deal, with a view to restructuring it.

Now Thomas Cook and Air Berlin have backed out of the proposed venture, although a spokeswoman for Thomas Cook said the merger of Condor and Air Berlin was still an option.

“The September 2007 contract for acquiring Condor in the course of a share swap was cancelled by mutual agreement,” the two companies said in a statement yesterday.

It added: “Both Air Berlin and Thomas Cook are interested in exploring other options.”

Falling demand for air travel and rising fuel costs also put the deal into doubt as Air Berlin's declining share price made the transaction look expensive for the tour operator. Thomas Cook shares dropped 9.6p to 174p, their lowest for almost two years.

In a statement to the Stock Exchange, the tour operator said: “Thomas Cook continues to view Condor as a strong business with significant potential.

While discussions continue with Air Berlin about the feasibility of an alternative transaction, Thomas Cook is also pursuing a range of other available options for Condor.”

Thomas Cook also said it was suspending its share buyback until further notice in the light of the decision to scrap the merger plans.

Analysts believe it is already looking at the possibility of adding Condor to the putative merger between TUIfly and Germanwings.

Alternatively, it could attempt to stop the merger and enter talks aimed at putting Condor with one or other party.

The company revealed last month that, while UK first-half losses had narrowed, Condor had sunk 38 per cent deeper into the red with a £30 million loss.

Mark Reed, analyst at Landsbanki, said the collapse of the deal was disappointing, if inevitable. “In our opinion this was the best deal Thomas Cook has announced since its inception, as we are less favourable on the other acquisitions, or prices paid for them.”

He added: “We are sceptical that any near-term alternative solution can be found for Condor, other than retaining it in-house. We do not believe a deal on equally favourable terms is possible.”

Meanwhile TUI, the German tourism and shipping group, said that the sale of its Hapag-Lloyd shipping line was going according to plan and that it expects to review non-binding bids by mid-August.

TUI said that a final evaluation of the options - a sale, a spin-off, or a merger - would only be possible once binding bids had been submitted by the autumn.

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