First-E, the Internet retail bank owned by Dublin-based Enba, and Spanish Internet bank Uno-e have scrapped plans to merge. The merger, originally valued at more than $2.4 billion (#2.66 billion), was announced in March 2000 but failed to achieve regulatory approval from the Spanish authorities.

Mr Gerhard Huber, chief executive of Enba, said last night the merger had ended after "carefully analysing the details of the operation and due to current market conditions". "We have reached the conclusion that both our companies need to focus on our respective core markets before undertaking any further expansion," said Mr Huber.

Ms Manuel Cantalapiedra, a banking analyst at Banesto in Madrid, said the announcement was no surprise. "Since the deal was announced a year ago we've had no news on how it was coming along . . . now BBVA [Uno-e's parent bank] is taking a more careful approach to the Internet."

The aborted merger raises doubts about the future viability of First-e, which employs almost 400 people in Dublin and has almost 215,000 customers in Germany and Britain. First-e had received a #100 million line of credit from BBVA, as part of the proposed tie-up. Neither side would comment on the status of this credit line last night. An Enba spokesman said the firm was well supported by a range of high-profile investors. It is understood that in February the company raised up to #30 million from these investors to give it breathing space if the Uno-e deal went sour.

The value of Internet banks has fallen dramatically as analysts question the business model for standalone Internet operations due to the high cost of obtaining customers.

This was reflected in the value of the proposed First-e and Uno-e merger which was revised dramatically downwards to $1.58 billion only three months after it was first announced. Further confirmation of the challenge facing such banks came with results from British online bank Egg yesterday. Though reporting a reduced pre-tax loss in the first quarter, it warned the rate of customer growth would fall.

Staff at Enba were informed of the failed merger last night. They were told resources were in place to meet operational requirements despite "unfavourable market conditions".

First-e has been undergoing a rationalisation process in recent months, pulling back from many of its marketing activities and reducing its staff numbers.

Late November it shed 70 staff at its Dublin operation and Enba is believed to be seeking an equity partner to help fund Factor-e, a technology firm which provides financial services to banks.