The Co-operative Group has pulled out of a deal to buy 600 branches of Lloyds TSB Bank, including several in Kent.

The shock move following months of planning costing millions of pounds has been blamed on the weakness of the economy and tougher bank regulations.

Eight Kent and Medway branches of Lloyds TSB and Cheltenham and Gloucester were to be sold under the so-called Verde deal.

C&G outlets in Ashford, Canterbury, Gillingham, Maidstone and Tunbridge Wells would have gone to the Co-op, along with Lloyds TSB branches at 208-210 High Street, Chatham, and Sheerness High Street.

The high street bank was ordered by the European Commission to sell part of its business as a condition of its 41% taxpayer bailout and a way of increasing competition.

The Co-op was chosen from a number of bidders. Its withdrawal is a blow to Chancellor of the Exchequer George Osborne who strongly backed the sale, claiming it would widen customer choice. It could also lead to Lloyds TSB triggering a public sale of the 600 branches, unless a new buyer can be found quickly.

Co-operative chief executive Peter Marks said: “After detailed and thorough consideration of all aspects of the Verde transaction, we have decided, at this time, that it is not in the best interests of our members to proceed with the transaction.

"Having worked closely and constructively with Lloyds we are naturally disappointed to have reached this conclusion.

“However, against the backdrop of the current economic environment, the worsened outlook for economic growth and the increasing regulatory requirements on the financial services sector in general, the Verde transaction would not currently deliver a suitable return for our members within a reasonable timeframe and with an acceptable level of risk.

“The Verde transaction offered a significant opportunity to The Co-operative and the sector as a whole as it would have created a major challenger bank.

"It was right therefore, for us to explore it in the detailed way we have.

"We were, however, clear from the outset that Verde was a complex transaction and that this was not the only option open to us to develop our Bank.

"We remain committed to driving The Co-operative Group forwards under our clear strategy and, as part of that, we will continue to develop our Bank for the long-term, offering a real alternative on the high street with our strong, established brand and our reputation as a trusted financial services business.”

Which? executive director Richard Lloyd said: "This is very bad news for everyone wanting to see more competition in retail banking anytime soon.

“The Co-op's decision is a setback to the Government's efforts to tackle the unhealthy dominance of our biggest banks.

"This would have given more choice to consumers who are sick and tired of shoddy service and unfair fees and put more pressure on the big banks to work for customers, not bankers."