The bank had warned in January that it would put the merger plan agreed in August on hold until the terms of debt-crippled Greece's bond restructuring were finalised. The lenders had initially sought to form the nation's largest bank to cope with a crisis that has caused rising bad debts and prompted many depositors to take their cash elsewhere.
Their share swap deal looked as if it would hit the rocks when it became clear that the Greek bond exchange - also known as private sector involvement (PSI) - would inflict a bigger hit on their portfolios, and disproportionately on Eurobank, which had roughly double the exposure.
The market has known for weeks that this merger effort had soured, an Athens-based banking analyst said. Today's development is them formally pulling out.
Greece on Monday swapped outstanding bonds with a face value of 177.2 billion euros (147 billion pounds) for new securities as part of a deal with private sector bondholders to cut its debt mountain. The exchange entailed a nominal writedown of 53.5 percent, with actual losses of as much as 74 percent.
The two sides had agreed to exchange five Alpha bank shares for every seven in EFG.
The merger's share swap had been based on significantly lower losses in terms of net present value (NPV) than the hit of 70 percent or more that the bond exchange will inflict, the bank analyst said.
Alpha Bank's board will convene a general shareholders' assembly where it will propose calling off the merger, a spokesman at Alpha Bank said. Alpha's board meeting is set for March 27.
The board will explain to shareholders why the merger is no longer in their interest, another Alpha Bank official said.
Alpha shares were up 6.3 percent at 1.51 euros, with Eurobank gaining 5 percent to 1.05 euros in early afternoon trade.
NO FORCED MARRIAGE
Eurobank, which had been keen on the deal all along, maintains the view that the merger would have been beneficial.
We believed the deal made sense and had serious synergies, but if Alpha does not want it, you can't have a forced marriage, a Eurobank official told Reuters on condition of anonymity.
Analysts said Alpha's move to pull out of the merger was expected as the bank had signalled it was not happy with the agreed terms since late January. It had then said it would wait for the final terms of the PSI before making its final decision.
Battered by the debt crisis, sovereign downgrades and an economy in its fifth year of recession, Greek authorities and the central bank have been urging banks to explore tie-ups in the hope of regaining access to wholesale funding markets.
Analysts say the focus will now shift to recapitalisation needs, which are likely to force Greek banks to turn to the Hellenic Financial Stability Fund, a state capital backstop, to shore up their capital ratios.
With the deal off, the market may be looking for other consolidation moves in the sector down the road, said Piraeus Securities analyst Natasha Roumantzi.
The important factor will be the terms of the recapitalisation process, which are expected to be specified towards the end of the month.
It is the third time Alpha has decided to go it alone after being involved in merger discussions.
In November 2001 it pulled out of an agreed merger with National Bank of Greece
($1 = 0.7628 euros)
(Additional reporting by Angeliki Koutantou; Editing by Will Waterman)