The move is a rare setback for Sprint's Japanese parent SoftBank Corp, whose billionaire founder Masayoshi Son had seen the acquisition as key to taking on U.S. market leaders AT&T Inc and Verizon Communications Inc.
Sprint, the No. 3 U.S. carrier, and T-Mobile have not ruled out consolidation in the future but concluded that a deal is unlikely to be approved at this time, the sources said. U.S. regulators have insisted that they want to keep the number of major wireless carriers at four.
"We didn't think the opposition would be this strong," said a SoftBank executive but added: "The environment will definitely change".
But the failure to reach a deal could give added impetus to a rival bid for T-Mobile by French telecoms firm Iliad. Iliad made a lower bid than Sprint but is in talks with U.S. cable and satellite companies to sweeten its offer.
In the wake of the failed talks, Sprint will appoint a new CEO - Marcelo Claure, founder of mobile phone distributor Brightstar Corp which was acquired by SoftBank last year, a separate person with knowledge of the matter said.
He will replace Dan Hesse who has been CEO of Sprint since 2007. Hesse led a rip-and-replace overhaul of Sprint's network infrastructure, causing cellular sites to go black and the company to hemorrhage subscribers.
Sources declined to be identified as the matter has not been disclosed by the companies publicly. Representatives for Sprint and SoftBank declined a request for comment. T-Mobile did not immediately respond to a request for comment.
Sprint shares were down 16 percent and T-Mobile shares were down 9 percent in after-hours trading.
SoftBank's shares fell nearly 5 percent in Wednesday morning trade in Tokyo to a two and a half month low, before paring losses to trade down 3.6 percent at 6,963 yen.
SoftBank bought about 80 percent of Sprint last year for some $20 billion, just one of many aggressive acquisitions by Son who has built SoftBank from a small software publisher into Japan's second-most valuable listed company. He has vowed to make SoftBank the world's largest Internet media company.
Sprint had agreed to pay $40 per share under the broad terms of an agreement worked out with Deutsche Telekom AG T-Mobile's majority owner, following months of talks.
By contrast, Iliad has so far offered only $33 per share for a 56.6 percent stake in T-Mobile. Possible partners to help it sweeten its bid include Dish Networks, Cox Communications and Charter Communications, sources have said.
Roger Entner, analyst at Recon Analytics in Boston, said the announcement could signal the tables may have turned on Deutsche Telekom.
"As long as there was a Sprint offer on the table, bargaining power was with Deutsche Telekom. Now the bargaining power is with Iliad," he said.
The failure of the Sprint-T-Mobile talks was first reported by the Wall Street Journal.
The announcement marks the second blockbuster deal to be abandoned on Tuesday after Rupert Murdoch pulled the plug on Twenty-First Century Fox's bid for Time Warner earlier in the day.
© Thomson Reuters 2014