In a joint statement, the UK-based cooperative groups said the discussions, which were ongoing since October, stalled over "unresolved" valuation issues regarding their operations.
A number of European dairy cooperatives have entered into discussions to merge their operations after continued hikes in the price for raw milk over the previous year, most noticeably with the joining of Friesland Foods and Campina.
First Milk communication director Paul Flanagan told DairyReporter.com that consolidation within this market was vitally important for UK dairy groups to compete with the likes of Friesland and other established producers like Arla Foods.
"A consolidation within the UK would have been important for the industry," he stated.
"Though we would not have been on the scale of groups like Arla, the merger was a channel that we believed was the best way to meet these expansion needs."
Although both First Milk and Milk Link stated that they were convinced that strong farmer-owned dairy groups represented the best long-term future for manufacturers in the country, they conceded that this was not currently possible by joining forces.
"As such, both will now continue with their plans to grow and develop their respective businesses," the two parties jointly stated.
Flanagan said that First Milk would continue to look at others options for expansion and growth within international dairy production.
"At the current speed of growth within the dairy industry, there is only so far you can go with organic growth," he said.
"We will now consider other plans for expansion inclusing acquisitions and perhaps even mergers."
It is not just First Milk and Milk Link left disappointed over the lack of resolution to the merger plan.
Gywn Jones, chairman of the UK dairy board, claimed that a major opportunity to strengthen the UK dairy industry in Europe had been missed.
"We know that all dairy farmers, not just members of the two co-ops, will be very surprised to hear the news that the merger has been called off," he stated.
"Quite rightly they will want to know exactly why the decision has been taken not to proceed and it is important that the companies communicate this transparently and accurately."
In a letter addressed to First Milk shareholders regarding the talks, failure to reach an agreement was said to relate particularly to a disagreement over the value of the company and its shareholding in Wiseman dairies.
Despite a review by a valuations expert of the two businesses, both companies could not reach an agreement on the final terms, according to the letter.