MEG's shares plummeted 36 percent in Toronto, while Husky stock jumped 12 percent.

The bid reflected Husky's strategy to double down on heavy oil production even though clogged pipelines drove down Canadian prices. But market conditions changed dramatically since Husky's September offer, and Canadian prices surged this month after the provincial government ordered temporary production cuts.

In a statement, Husky said the government intervention and a lack of progress on expanding pipelines hurt the "business and economic environment."

While production cuts have helped some producers, integrated companies like Husky previously benefited from processing cheap oil in its refineries.

Alberta's move and declines since autumn in global crude prices likely swayed Husky not to extend its offer and try to complete the deal, CIBC analyst Jon Morrison said in a note.

Husky was expecting to secure over 50 percent support from MEG's shareholders, people familiar with the situation told Reuters on Wednesday ahead of its deadline.

It had offered to buy MEG for C$11 in cash per share or 0.485 of a Husky share. Those Husky shares lost nearly one-third of their value since the offer, however, making the bid less attractive.

"Given the outcome of the tender process, Husky will continue to focus on capital discipline and the delivery of the five-year plan," Husky Chief Executive Officer Rob Peabody said in a statement. Husky did not say how much support it received.

Husky last week put a refinery in British Columbia and a chain of gas stations up for sale, deeming them "non-core."

In a statement, MEG Chief Executive Derek Evans said the result confirms the offer did not recognize the company's quality and long-term potential. The heavy oil producer is now likely to return to its plan to expand production, according to AltaCorp Capital.

Hostile takeovers are rare in the Canadian energy sector. Suncor Energy's hostile bid for Canadian Oil Sands in 2015 met with resistance before they agreed to a sweetened deal.

Husky had argued its bid gave investors exposure to Husky's stronger balance sheet.

MEG shares were down 36 percent at C$5.48 on the Toronto Stock Exchange, while Husky stock was 12 percent higher at C$17.47.

A sharp decline in MEG's stock could prompt an "opportunistic" offer, Eight Capital Research said in a note.

($1 = 1.3250 Canadian dollars)

(Reporting by John Benny in Bengaluru, John Tilak in Toronto and Rod Nickel in Winnipeg; Editing by Chizu Nomiyama, David Gregorio and Susan Thomas)

By Rod Nickel and John Benny