The Co-operative Group has pulled out of a £750 million deal to buy 632 ‘Project Verde’ branches from Lloyds Banking Group.

The Co-op had hoped to add the branches to its existing 342 UK premises to create a new high street bank, but has blamed the poor economic outlook and tougher regulatory environment imposed on banks for its decision to pull out of a deal to buy the bank branches, reports the BBC.

It is rumoured that the Co-op board agreed to pull out of the deal in a meeting last week; a decision which Lloyds is believed to have only been informed of yesterday.

Lloyds' Chief Executive Antonio Horta-Osorio said: "We are disappointed that the Co-operative Group is unable to complete this transaction."

The sales of the branches, known as Project Verde, was demanded by European regulators as the price for being bailed out by the government during the financial crisis.

Under the terms of the competition ruling, Lloyds must sell or dispose of the branches by the end of November 2013 as part of a package linked to the state aid provided at the time of Lloyds’ takeover of HBOS.

Lloyds has said it will now seek to sell the branches as a stand-alone bank through a stock market listing. However, such action is unlikely to be possible until the second half of 2014, which would mean the UK government and Lloyds asking Brussels to extend its end-2013 deadline for the sale.

Both institutions had previously agreed the terms of the deal in July 2012: the Co-op was to pay an initial fee of £350 million for the branches and £400 million in additional payments, subject to performance of the group’s banking business over a 15-year period.

This involved the potential transfer of £24 billion of mortgages, 8,000 staff, 4.6 million customers, including 3.5 million in England and Wales, and the remainder in Scotland.

Customers in England and Wales had already received letters telling them of the move and giving them the option to stay with Lloyds. This information is still relevant, as customers of the branches being sold will still become customers of the new TSB Bank.

The aborted takeover would have created Britain's seventh-biggest bank, accounting for about 5 per cent of personal current accounts and the mortgage market and about 10 per cent of the branch network.

The Lloyds statement said: "The Co-operative Group's board has decided that they can no longer proceed with a purchase of the Verde business given their view of the impact of the current economic environment, the worsened outlook for economic growth and the increasing regulatory requirements on the financial services sector in general."

During the summer the branches will be branded as TSB Bank, and the group will operate as a separate business within Lloyds ahead of a sale.

The Co-op's 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.

"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 news comes four weeks after Co-op posted a £599 million loss for the year to January 5th 2013.

It is thought a number of the parties, such as the Royal Bank of Scotland, could also be interested in the Verde assets.