The world's biggest mining company BHP Billiton has pulled out of its $100 billion bid for its rival Rio Tinto.

The company says the global economic downturn and the drop in commodity prices are behind the collapse of one of the biggest takeover bids in history.

The board of BHP Billiton is abandoning its offer for Rio Tinto because it says the takeover is no longer in the best interests of shareholders.

The company says it understands the main regulator still needed to approve the bid, and the European Commission will ask it to sell assets to deal with competition concerns.

But BHP says it will not offer any remedies to the regulator, because of the difficulty of achieving fair values for those assets in the current climate.

BHP chief executive Marius Kloppers says cancelling the bid was a tough decision.

But he says after the fall in commodity prices, BHP cannot risk taking on Rio Tinto's tens of billions of dollars of debt or the difficulty of selling off assets in the current climate to placate competition concerns.

"We cannot go forward with this deal if we don't create value for both sets of shareholders, and that's the conclusion that we reached today," he said.

He says even if Europe's competition regulator were to approve the bid, the board would recommend shareholders vote against the deal.

But even though BHP says it is trying to protect shareholders, it will still write off almost $500 million in costs related to the bid process over the past year-and-a-half.

'High risk'

Mining analyst Gavin Wendt from Fat Prophets told ABC Radio's PM program he is not surprised BHP has pulled out of its bid for Rio.

"This was always a high risk, a highly uncertain strategy and basically financial markets as they've panned out over the last six to 12 months, have basically knocked it on the head," he said.

"Of course there was the uncertainty with regards to European Commission approval and the European Commission has expressed concerns over the takeover.

"At the end of the day I think for BHP to actually meet the European Commission's concerns was going to lead to a sell-off of key iron assets that would have destroyed the whole rationale for the merger in the first place."

He says the continued deterioration of global economic conditions and falling commodity prices have also played a part.

"There's a lot of uncertainty around in financial markets and it's very, very hard to raise debt financing. It just makes it very, very difficult to launch any sort of takeover bid, particularly at the big end of the market; we're talking about one of the biggest takeover bids in corporate history," he said.

"We're in uncharted waters and whilst BHP and Rio Tinto are amongst the world's best managed companies, this has thrown a tremendous spanner in the works.

"I think the prudent course of action for BHP is just to sit tight and keep its powder dry and perhaps look at another tilt at Rio Tinto down the track once financial markets have improved and uncertainty has been removed from the market."

He says only time will tell what impact the decision will have on confidence in the resources sector.

"Obviously confidence in the market generally has taken a big hit over the last couple of months, but at the end of the day, I agree with the comments of BHP and Rio Tinto, that longer term we're going to see strong growth out of China, we're going to see strong growth out of the emerging economies and the fundamental medium to longer term picture hasn't changed," he said.

"Although of course we've seen a big short term deterioration in markets and commodity demand, that's obviously impacted on BHP's decision, but I think the longer term picture is still extremely sound."