The decision marks the end of a more than year-long battle by the German group to win control of Endesa and opens the way for a takeover of the utility by its biggest shareholders, Spanish construction group Acciona and its Italian partner Enel.

E.ON said that it had agreed with Enel and Acciona that if they gained control of Endesa, E.ON would receive a "significant portfolio" of assets in France, Italy, Spain, Poland and Turkey worth about 10 million euros.

Enel chief executive Fulvio Conti said that a new takeover offer to Endesa shareholders would be made "immediately" which would be "clearer and on better terms." In Madrid, Acciona said that a joint takeover bid for Endesa would be launched with Enel "very soon."

Last week, the Spanish market regulator had ruled that the two firms, which control 46 percent of Endesa, should wait six months from the end of the acceptance period for E.ON's bid before launching their own bid. E.ON's 42-billion-euro bid, which was widely expected to fail, was set to expire on Tuesday.

"Today, E.ON signed an agreement with Enel and Acciona in order to put an end to the substantial uncertainty surrounding the takeover bid for Endesa," E.ON said in a statement. "Therefore, E.ON will not carry out the takeover bid designed to acquire a majority stake in Endesa."

E.ON backs down after resistance in Spain

E.ON has raised the value of its initial offer for Endesa, made in February last year, three times. The German group's efforts have been resisted by the Spanish government, which initially favored a rival bid for Endesa from Spanish utility Gas Natural.

Under the deal struck with Acciona and Enel, E.ON will acquire the power utility Viesgo from Enel in Spain, as well as additional

generation capacity from Endesa.

It will make E.ON the fourth-biggest energy group in Spain with a market share of over 10 percent. In Italy, the company said it would acquire Endesa Italia and become the fourth-biggest power producer in the country. In France, it is expecting to become the third-biggest player in the electricity generation sector through the acquisition of Endesa France/SNET.

E.ON's chief executive, Wulf Bernotat, said the company had realised that it would not achieve its aim of securing a majority stake in Endesa and taking a minority stake would have created a stalemate.

"Acciona and Enel's involvement in Endesa has made our original goal of acquiring a majority stake in Endesa impossible," he said. "Obtaining a minority interest in Endesa would have led to a stalemate between the shareholders and triggered unpredictable lawsuits. The agreement we have reached with Enel and Acciona will rapidly establish clarity for everyone involved."

Acciona first bought a stake in Endesa last September, while Enel entered the fray in February, shortly after a Spain-Italy summit. The timing of the move by Enel led to suggestions that a joint takeover by Acciona and Enel had been instigated by the Spanish government.

Spain clashes with EU regulators over protectionist claims

Madrid has been fighting tooth and nail to keep E.ON from taking over Endesa, even though EU competition regulators have approved the deal.

The E.ON-Endesa case has been widely seen in Brussels as a flagrant example of protectionism by Spain.

The European Commission, which polices competition policy in the EU, opened a second lawsuit on Wednesday because Spain had defied its repeated requests for Madrid to lift conditions it had imposed on E.ON's bid for Endesa.