Ernst & Young's brief statement said Andersen was notified of its decision early Wednesday. The firm stated "as long as Enron and other Andersen litigation matters are unresolved, it is not in the best interests of our people, clients, and our firm to pursue such a combination."

Similarly, Deloitte said it "was unable to continue to the next stage of discussions due to Andersen’s unresolved litigation and legal issues" and ended preliminary discussions with Andersen yesterday.

Ernst & Young was the first of the Big Five to cease discussions with Andersen. Deloitte followed suit Wednesday evening upon reports that the Justice Department will file criminal indictment charges today against Andersen for its role in Enron's collapse.

"Deloitte continues to support any reasonable proposal that offers Andersen the ability to survive as a free-standing organization for the benefit of its clients and people," said the company in a statement.

According to reports, PricewaterhouseCoopers and KPMG have also been discussing merger or acquisition options, but Ernst & Young and Deloitte were the two firms that Andersen appeared to be courting. The hesitation to pursue stems from the lack of protection from Andersen's Enron-related legal baggage.

Experts indicate a Chapter 11 bankruptcy may be the next best step for the firm, which continues to lose its clients -- dozens thus far -- at a rapid rate. Top clients such as Delta Air Lines, FedEx and Merck & Co. all dropped Andersen this month and signed on with rival accounting firms. In addition, Andersen lost three more clients yesterday: Household International Inc., Amrep Corp., and National Bank of Canada.

To stop the bleeding, Andersen has offered a $750 million deal to settle lawsuits brought on by creditors, employees and shareholders, but there has been no resolution.

Placing more pressure on the embattled firm is the U.S. Department of Justice, which sources say will  charge Andersen with obstruction of justice for failing to prevent Enron-related document shredding after company officials learned Enron Corp.'s accounting procedures were the subject of lawsuits and a federal inquiry, reports the Wall Street Journal. Andersen has until today to enter a guilty plea.

Meanwhile, former Federal Reserve chairman Paul Volcker, hired by Andersen to head up its internal review board, recommended earlier this week that the firm protect the independence of the auditing function by restructuring -- separating "consulting with respect to substantial Information and Communication Technology (ICT), strategic planning, the practice of law, organized executive recruitment, and certain areas of “aggressive” tax planning and advocacy unrelated to auditing."

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