Having initially agreed a price of $35.5 billion (Â£24.6 billion) in March, the firm asked AIA's parent company AIG to accept a price closer to $30.4 billion last week.
After AIG rejected the revised offer on Tuesday (June 1st), a statement from Prudential confirmed the deal had collapsed.
"Unfortunately, it has not been possible to reach agreement. We are therefore withdrawing from the transaction," explained Prudential chairman Harvey McGrath.
Analysts have claimed the termination of the deal is likely to increase the pressure on Mr McGrath and chief executive Tidjane Thiam.
Robin Geffen of Neptune Investment Management described the bid for AIA as an "absurdly ambitious" deal that suffered from "a very unclear strategy".
Meanwhile, Prudential's statement revealed the firm now faces costs of approximately Â£450 million from the failed acquisition, including a break-off fee of Â£152 million.
By Tony Aynsley