The £21bn merger between the London Stock Exchange and its German rival Deutsche Börse has fallen apart after it was blocked by the European commission on the day that Britain served notice on its EU membership.

Margrethe Vestager, the EU competition regulator, said the deal between the London and Frankfurt exchanges would create a “de facto monopoly in the crucial area of fixed income instruments”.

The commission’s opposition ends a deal that had been in the making for 13 months. LSE Group and Deutsche Börse had pledged to press ahead with the deal even after Britain voted to leave the EU last June, but this is the third failed attempt at a merger between the two companies after previous setbacks in 2000 and 2005.

The proposed tie-up had been criticised across Europe, including in France, Belgium, Portugal and the Netherlands, which were concerned about the future of their own exchanges. Critics in Frankfurt also questioned why the enlarged company was going to be based in London given Deutsche Börse would have held 54.4% of the shares in the group and Britain is leaving the EU.

Shares in LSE Group rose as much as 3% after the announcement as investors in the company breathed a sigh of relief at the end of the saga.

The merger has been in doubt since LSE announced last month that the commission was unlikely to provide clearance for the merger unless it sold its Italian trading arm, MTS, to ease competition concerns.

Vestager confirmed on Wednesday that LSE and Deustche Börse had refused to meet her requests to offset concerns about competition.

She said: “The European economy depends on well-functioning financial markets. That is not just important for banks and other financial institutions. The whole economy benefits when businesses can raise money on competitive financial markets.”

Referring to the exchanges’ key role in the bond market, she added: “The merger between Deutsche Börse and the London Stock Exchange would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments. As the parties failed to offer the remedies required to address our competition concerns, the commission has decided to prohibit the merger.”

Vestager said her decision was not affected by the prospect of Brexit, and that any future deals involving the LSE and Europe would still be reviewed.

“We deal with any company who has a footprint in the European market, because we want competition in the European market, no matter your flag and no matter your ownership. That goes for everyone,” she said.

In a statement, LSE Group expressed its disappointment at the decision and confirmed the agreement between the companies had been terminated. It had agreed to offload its French clearing business, LCH, to the European exchange Euronext for €510m (£443m) to help smooth the passage of the merger.

LSE Group said: “LSEG believes the proposed merger with Deutsche Börse in combination with the LCH SA remedy [the sale of LCH] would have preserved credible and robust competition in all markets.

“This was an opportunity to create a world-leading market infrastructure group anchored in Europe, which would have supported Europe’s 23m SMEs and the development of a deeper capital markets union.”

However, LSE Group said it was “confident in its prospects as a standalone business and its strategy for growth continues to deliver strong results”. It said it would press ahead with the return of cash to shareholders that it had promised as part of the Deutsche Börse deal.

“Accordingly, LSEG now plans to initiate an on-market share buyback of £200m, an amount broadly equivalent to the return it would have made had the merger with Deutsche Börse proceeded as planned,” LSE Group said.

“LSEG continues to be actively engaged in exploring selective inorganic and ongoing organic investment in order to drive further growth and will continue to consider opportunities for further capital returns in line with its capital allocation framework.”