AT&T will instead take a $4 billion accounting charge in its fourth quarter. That's the breakup fee it agreed to pay Deutsche Telekom, T-Mobile's parent, if the bid fell through.

AT&T CEO Randall Stephenson said in a statement that "customers will be harmed

The companies "just got tired of pushing the rock uphill," says Michael King, research director at Gartner. "They got every indication that the FCC and Justice Department were going to be very aggressive in stopping the deal."

AT&T will enter a "beneficial roaming agreement with Deutsche Telekom," and pursue other expansion plans, it said in a statement. The carrier needs to boost the amount of wireless spectrum it controls to fully exploit fast-rising demand for mobile services. "AT&T will continue to be aggressive in leading the mobile Internet revolution," Stephenson says.

AT&T ignited a firestorm of criticism when it announced the deal in March. Sprint Nextel argued successfully that the merger would create a duopoly harmful to competition, with AT&T and No. 1 Verizon Wireless controlling 80% of the U.S. cellphone carrier market.

In late August, Justice sued to block the deal; regulators said the merger would result in higher consumer prices and reduced competition and choice. FCC Chairman Julius Genachowski also came out against the merger.

AT&T tossed in sweeteners to no avail, including $8 billion it said it would spend to supply ultrafast wireless to rural areas and a vow to bring 5,000 wireless call-center jobs back to the U.S. Sprint and smaller phone company C Spire Wireless sued to stop the deal, and Dish Network CEO Joe Clayton said last week that Dish would consider a partnership with T-Mobile if the AT&T deal fell through.

"The silver lining for the consumers in this is that competition stays in place, at least for the short term," says Jack Gold, principal analyst at research firm J.Gold Associates. "I find it very difficult to believe this would have resulted in more, rather than less jobs, and reduced rates and improved services, as AT&T claimed."

Shares of AT&T, which closed at $28.74, fell 5 cents in after-hours trading.