Delta Two, an investment fund backed by the Gulf state of Qatar, has decided to terminate its bid, which was worth the equivalent of $21.7 billion.
"Delta Two has concluded that it is not in the best interests of stakeholders to proceed with an offer for Sainsbury, and has informed the board of Sainsbury of this decision," the group said in an official statement.
The news sent Sainsbury's share price plunging by 17.93 percent to 455.50 pence in early morning trade on London's falling FTSE 100 index of leading companies.
The Qatari bid fell victim to an ongoing global credit squeeze that has been sparked by a crisis in the subprime or high-risk housing sector in the United States.
Analysts say that the troubled US housing market has led banks worldwide to curb the availability of credit to companies - which makes it difficult for bidders to finance an acquisition.
Delta Two had proposed its takeover bid for Britain's third-biggest supermarket operator last July. This week, however, it faced a Thursday deadline to declare a formal offer.
"Since Delta Two's original proposal was submitted to the board of Sainsbury, the required funding and cost of capital has increased significantly, which has adversely affected the investment case," it added.
"This reflected a combination of factors, including the deterioration of credit markets, which impacted the terms of lending and other facilities available to Delta Two, following the initial approach to the Sainsbury Board and the arrangements for the future funding of the Sainsbury pension schemes."
Delta Two, which owns 25 percent of Sainsbury, added that it remained "fully supportive" of the group's management.
"Sainsbury is an excellent company with a strong management team, leading market position, and strong long-term growth opportunities," it said.
"Delta Two remains fully supportive of management's operational strategy."
In a separate statement Monday, J Sainsbury noted that Delta Two had decided not to proceed with an offer.
The clothing-to-food retailer added: "Looking forward, the board of Sainsbury's believes that the company continues to have great potential under the leadership of its strong management team.
"Sainsbury's remains committed to completing its recovery plan and delivering improved performance."
Delta Two's parent company is the state-linked Qatar Investment Authority, which is a Qatar government-controlled, non-corporate entity that invests in local and international markets.
Earlier this year, J Sainsbury had snubbed a consortium takeover bid, said to be worth about £10.1 billion, from private equity groups Blackstone, CVC and Texas Pacific Group.
The supermarket chain is the third-largest in Britain after sector leader Tesco and number two Asda, which is owned by US giant Wal-Mart.
Sainsbury employs 148,000 staff and has 788 supermarket branches across the country.
© 2007 Agence France-Presse
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