AMSTERDAM (Reuters) - UPS (>> United Parcel Service, Inc.) is dropping its $7 billion bid for Dutch delivery firm TNT Express (>> TNT EXPRESS) after European anti-trust regulators said they would veto it, leaving TNT's future in doubt and almost halving the value of its shares.

Shares in U.S.-based United Parcel Service Inc (>> United Parcel Service, Inc.) gained 1.2 percent on Monday after the world leader in the sector said in a statement that European Union officials told it the EU executive Commission would veto the deal. An EU source confirmed that and said the decision could be made public as early as next week.

UPS wanted to buy the smaller firm for its European network and assets in fast-growing Asia and Latin America. While the collapse of the 5.2 billion euro takeover means a rethink at UPS, the impact is far greater on TNT, which is struggling in a weak European market and lacks a strategy for developing on its own after nearly a year of negotiations on the merger.

Investors wiped nearly 2 billion euros off its value as the share price dived 42 percent to 4.750 euros.

The two companies offered to sell some operations to ease concerns about competition in Europe, where rivals FedEx Corp (>> FedEx Corporation) and DHL had lobbied the Commission to block the deal, a banking source said. But UPS and TNT failed to find buyers and planned asset sales were not enough to satisfy EU officials.

"It's more than a minor setback" for UPS, said Kurt Hoefer, research analyst at portfolio manager Golub Group in San Mateo, California, which holds UPS shares. "It would have been a nice addition to have TNT's domestic routes as part of the UPS system."

Having been blocked in its attempt at a large takeover, UPS will likely return to its prior strategy of pursuing strings of small deals on the continent, Hoefer said, adding, "I don't think they have any alternative but to grow it organically."

UPS will pay TNT a termination fee of 200 million euros.

Shares in U.S.-based FedEx were slightly firmer, up 0.3 percent, while those of DHL's German parent Deutsche Post (>> Deutsche Post AG) were down by a similar margin. Deutsche Post's finance chief told Reuters the company had no interest in buying TNT nor any other express delivery business.

UNCERTAIN FUTURE

TNT faces an uncertain future. It has had to cut capacity in Europe in response to falling demand, was hit by restructuring problems in Brazil and is considered a minor player in China. Its chief executive quit soon after UPS made its offer in March.

TNT had been partially split from Dutch postal operator PostNL (>> POSTNL) in May 2011 in an attempt to profit from express operations as traditional mail business declines. But its weak performance quickly prompted activist shareholders to push for a management shake-up or an outright sale.

"Now TNT will have to continue alone," said Philip Scholte, an analyst at Rabobank. "TNT's management will have to roll up their sleeves, come up with a plan and get down to work."

TNT, which reports annual results on February 18, said it would update investors on its strategy in due course. Shares in PostNL, its biggest shareholder, plunged by over a third.

A new merger proposal for TNT seems unlikely, at least in the short term. Its closest European rival, DHL, is bigger in Europe and would be unlikely to get EU competition approval.

"FedEx is the only other option," said analyst Maarten Bakker at ABN Amro. "And they are not going to be in any hurry because there is simply no rival bid."

Others suggested TNT would be a poor fit with FedEx.

"They seem to be committed to faster-growing regions, and adding a thoroughly unionized European Union entity to the FedEx mix would certainly be a shock to that culture," said Morningstar analyst Keith Schoonmaker, who noted that few FedEx employees are unionized.

A FedEx spokesman declined to comment on whether the company would pursue a bid for TNT.

COMPETITION POLICY

Any bid from an existing operator will face questions from an EU Commission concerned about prices being pushed up and wary of mergers that shrink any market to three players from four, as would have happened had UPS faced only FedEx and DHL.

Competition commissioner Joaquin Almunia said last week that UPS would need to create an equivalent rival to TNT before he would approve the deal. In the end, the U.S. firm seemed not to have done enough to help France's DPD expand its challenge.

UPS had offered to sell warehouses and customer bases in 15 countries, mainly in eastern Europe, and discussed divesting other assets, including some to FedEx, according to media reports. But FedEx and DPD did not take up offers of assets.

"FedEx's heavy lobbying against the deal didn't help either, and more generally the lack of bidders was a problem," said a source familiar with the deal. "FedEx didn't offer to buy any of the assets on the block. La Poste-DPD were very close to buying the international express unit but it didn't happen in the end."

UPS CEO Scott Davis voiced his disappointment: "We proposed significant and tangible remedies designed to address the EC's concerns with the transaction," he said in a statement.

The European Commission, however, was left unimpressed.

In other anti-trust rulings recently, Almunia vetoed a $7.4 billion financial exchange merger between NYSE Euronext and Deutsche Boerse in February, saying the deal would have given the new company a lock on European futures trading.

This month Hutchison Whampoa (>> Hutchison Whampoa Limited) overcame his concerns that its purchase of Orange Austria would reduce competition in the Austrian telecoms market only by agreeing to help other companies break into the market.

Universal Music Group staved off an EU veto on its $1.9-billion plan to buy EMI's recorded music unit in September only after promising to sell some of the British firm's most valuable labels, to get its market share below 40 percent. ($1 = 0.7493 euros)

(Additional reporting by Scott Malone in Boston, Foo Yun Chee in Brussels, Sophie Sassard in London and Lynn Adler in New York; Editing by Peter Graff, Alastair Macdonald and Dan Grebler)

By Sara Webb and Anthony Deutsch