TUI AG had approached TUI Travel will the possibility of a merger, but has now ruled out a takeover. Both shares dropped. (Reuters)

TUI AG shares tumbled in early trading after the German travel and tourism giant said it would not make an offer to takeover FTSE 100-listed firm TUI Travel, in which it already holds a majority stake.

TUI Travel, Europe's largest tour operator which was formed by the merger of First Choice Holidays PLC and the travel division of TUI AG, had said that it was approached by its largest shareholder with the possibility of merging the two firms.

"This decision is based on the assessment that a share-based transaction at current exchange ratios is not in the interest of TUI shareholders," said a statement on TUI AG's website.

"Irrespective of this, TUI AG will continue fully to exercise its role as majority shareholder in order to leverage the value potential and benefits within the TUI Group for the benefit of all shareholders and other stakeholders of TUI AG."

At 09:17 CET, TUI AG shares had fallen by more than 4 percent to 7.65 cents on the Frankfurt stock exchange.

In London, TUI Travel shares had also slumped, down by almost 4 percent to 280.90 pence.

UK market rules dictate that because of TUI AG's statement it may not launch a takeover bid within six months of its announcement.