In a statement today, the company said the decision had been driven by new US rules aimed at preventing so-called tax inversions, announced on Monday.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies," said Ian Read, Pfizer's chairman and chief exec.
"We remain focused on continuing to enhance the value of our innovative and established businesses."
It was thought Pfizer was aiming to move its headquarters to Ireland, where Allergan is registered, as part of the deal. Ireland's corporation tax rate is one of the lowest in the world.
The news came as a blow to Allergan, whose shares fell 15 per cent in pre-market trading - but sent UK pharma into an ecstatic frenzy: in lunchtime trading, Shire and AstraZeneca were leading the FTSE 100, up 3.3 per cent to 4,181p and 2.9 per cent to 4,066p respectively.
GlaxoSmithKline was also up 2.1 per cent, at 1,448p.
That could be thanks to analyst speculation that Pfizer hasn't finished.
"Reports that the Allergan-Pfizer merger has been terminated has counter-intuitively sparked buying in other UK and Irish pharmaceutical groups," said Jasper Lawler, market analyst at CMC Markets.
"Speculation that Pfizer will look for another partner in its quest to relocate its headquarters and lower its tax burden has sent the shares of Shire and AstraZeneca flying."