Both Cliffs’ and Alpha’s boards said they had decided to scrap the deal blaming the current macroeconomic environment, uncertainty in the steel industry, shareholder dynamics, and risks and costs of potential litigation.

“Considering these issues, each board determined that settlement of the litigation and termination of the merger agreement were in the best interests of its equity holders,” Cliffs said in a statement.

Both Cliffs and Alpha said they had approved settlement of litigation brought by Alpha in Delaware Chancery Court, with Cliffs to pay Alpha $70 million.

The definitive merger agreement originally announced in July, under which Cliffs would have acquired all outstanding shares of Alpha, was based on figures prior to the collapse of iron ore demand and uncertainty in coal prices.

The cash and stock deal would have seen the combined companies controlling a portfolio of nine iron ore mines and more than 60 coal mines in North America, South America and Australia.

It was originally estimated the two companies could have had a combined pro forma revenue this year of about $6.5 billion. Revenue for 2009 could have reached $10 billion.

Only two weeks ago Cliffs said it was determined to continue to forge ahead with the Alpha acquisition despite the global financial crisis.

The proposed purchase had not been without controversy, with Cliffs’ largest shareholder, Harbinger Capital Partners, making a play for up to one-third of voting rights in the company in September in order to block the deal.

Cliffs shares closed Monday down 3.1% at $19.65, while Alpha shares fell almost 6% to $24.90.