Sources close to the deal say that Merkel refused to back the deal because of issues over state stakes.
Yesterday EADS said there had been a breakthrough between the French and the English regarding a cap on the amount of power the state could impose on the merged firm, but Germany was said to oppose the proposals.
The deal needed government approval to be green-lit.
Ian King, chief executive of BAE Systems, said today that he was “disappointed” to call off the merger.
He added: “However, our business remains strong and financially robust. We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate. We remain committed to delivering total shareholder value and look to the future with confidence.”