The surprise move to withdraw the 530p a share offer for the LSE was taken at meeting of the Frankfurt exchange's management board yesterday.
The LSE, led by Clara Furse, had refused to recommend the Deutsche Börse offer to its shareholders when it was informally tabled in December on the basis that it undervalued the market.
Instead, she opened talks with the Frankfurt market and its Amsterdam rival Euronext in the hope of creating a bidding war.
She will now face fresh scrutiny. The LSE share price has already fallen from above 580p shortly after the Deutsche Börse bid on the hope of an auction and last week fell below the 530p German offer price as opposition increased among the exchange's investors.
The focus may turn to Euronext, which has said it wants to submit an offer for the LSE but which is yet to a name its price.
It may now feel vindicated by its decision not to enter a war over price and feel the pressure is off to show its hand.
Mr Seifert, who has faced calls for his resignation, said the money that would have been spent on the bid will instead be used for a buy-back of its shares. In so doing, he addressed one of the main concerns of a group of rebel investors, led by hedge fund The Children's Investment Fund (TCI).
Mr Seifert, who has tried unsuccessfully to do a deal with the LSE before, said: "We continue to believe that shareholders, issuers, investors and intermediaries would all benefit from consolidation of the European exchange landscape as contemplated in our proposal ... However, the London Stock Exchange does not find itself in a position to recommend a transaction at a price we find supportable."
In a sign that the withdrawal was being made in order to heed the pressures from investors, he said: "We believe the proposed transaction would have been value enhancing for Deutsche Börse shareholders.
"At the same time, we recognise that a significant portion of our shareholder base is focused on return of capital in the short term."
The rebel group had lined up an alternative management team to replace Mr Seifert and his colleagues.
The City will be surprised that Mr Seifert made the concession to investors ahead of a decision by the Office of Fair Trading, expected later this month, on the competition implications for an LSE takeover. The OFT had already said it would not refer the matter to the Brussels authorities, despite the possible implications for Europe's capital markets from the takeover.
The OFT is considering the possible offer from Euronext, which has always been careful to say that there is no certainty it will make offer.
In withdrawing it current offer, the German exchange said it retained the right to reenter the fray if Euronext or any other party bid for the LSE.
In deciding whether to make a formal offer for the LSE, Euronext might face some of the issues that have been encountered by Deutsche Börse since some of the hedge funds, which own shares in the German market, also invest in Euronext.
There had been some speculation that the hedge funds might try to stop Deutsche Börse in an attempt to clear the way for Euronext.
The owner of the Frankfurt Stock Exchange, Deutsche Börse has said it is quitting the takeover of the owner of the London Stock Exchange, LSE. Its planned GBP 1,3 billion (EUR 2 billion) takeover (530p per share) was stopped by opposition for various shareholders from both parties. Its announcement is a setback for the chief executive Werner Seifert. 

This just leaves the Euronext NV as the sole bidder of the LSE. It owns the stock exchanges in Paris, Amsterdam, Brussels, Lisbon and the tiny London-based exchange Liffe.