Credit Agricole - France's largest retail bank - yesterday confirmed it would not bid for Alliance & Leicester.
The decision had been widely expected after the French firm focused on a Greek takeover deal.
"Alliance & Leicester remains the best takeover play in the UK - but 2008 is more likely than 2006 and Santander is the most logical bidder," said Ian Gordon, an analyst at Dresdner Kleinwort.
A&L, which has a current stock market value of about £5 billion, is one of the UK's smaller mortgage banks and widely regarded as a takeover target, along with Northern Rock and Bradford & Bingley.
Credit Agricole said in May it was examining A&L as a possible acquisition opportunity.
However, analysts said there were no clear synergies for France's biggest retail bank if it bid for A&L, since CA does not have a large presence in Britain.
It said it had not submitted an offer proposal and had not conducted any "non-public due diligence".
Mr Gordon added: "Credit Agricole's decision is sensible. They've put their shareholders first. There's been a bit of a megalomania debate about Credit Agricole, and on this transaction they've shown discipline."
Credit Agricole's recent decision to acquire full control of Greek lender Emporiki heightened speculation that it would abandon A&L.
A&L welcomed Credit Agricole's statement, saying it provided clarity and added that the bank would focus on its own performance. Analysts said its growth prospects were modest. It has increased mortgage market share but at the expense of lower margins, leaving overall profits flat.
Some analysts expressed surprise at Credit Agricole's interest in the UK bank in the first place.
"I can't understand why Credit Agricole were ever considering it," said West LB analyst James Hamilton.
Attention is now likely to shift back to Santander, which could extract cost savings from combining A&L with its existing UK business Abbey and benefit from Spanish tax breaks. But Santander is still implementing its technology across the Abbey network and appears more focused on deals in Italy and the US.
"Alliance & Leicester isn't a trophy asset. It's a bolt-on deal they can do when the time is right," Mr Gordon said.
Others said that while Britain's seventh-biggest bank might remain a long-term bid target, its share price could suffer in the near term.
"While there may be other potential bidders for A&L over the long term, the current bid premium will evaporate," investment bank Keefe, Bruyette & Woods said in a research note.
A&L chief executive Richard Pym said: "The announcements by Credit Agricole have not diverted Alliance & Leicester from our focus on delivering our strategy and we welcome the clarification this announcement provides.
"We continue to progress well against our strategic objectives as we become the UK's leading direct bank."
Credit Agricole said the decision followed "further analysis" of Alliance since May and "the returns it could generate from an offer".
"In the light of this analysis, Credit Agricole has decided that it does not wish to proceed with an offer for Alliance & Leicester," it said in a statement to the stockmarket.
Reports earlier this year said that Alliance boss Mr Pym was looking for an offer of around 1500p a share, valuing the bank at £6.7 billion.
Credit Agricole said it reserved the right to table a bid for Alliance in the next six months if a rival suitor made an offer.
It has around 130,000 staff and is the largest high street bank in France following its acquisition of Credit Lyonnais in 2003.