News UK, Trinity Mirror, Guardian Media Group and Telegraph Media Group have been working with DMGT since last summer on the drive, previously called Project Juno and now dubbed Project Rio, in the face of plunging print ad revenues.
It is understood that DMG Media, the consumer publishing arm of DMGT, will remain on the sidelines of the project, rather than cutting all links.
The publisher was always believed to be cool on the idea of joint newspaper ad sales but participated in the talks.
DMGT was said to feel the legal obstacles and costs were too high, with little chance of persuading regulators at the Competition and Markets Authority.
Even those who remain on board admit the competition hurdles look even more daunting than when work began last summer and a submission to the CMA is some way off.
A spokesman for DMG Media said it has "decided to step back from direct involvement" to focus on "a number of its own broader commercial priorities", including "initiatives related to its international media businesses and its data-driven programmatic solutions".
DMG Media added it "remains committed to working closely with its fellow UK news media publishers", including supporting trade body Newsworks and opposing "punitive legislation like Section 40".
A spokesman for Project Rio said: "The project companies remain committed to finding greater scale for advertisers through our digital and print channels.
"While we are disappointed that DMG have withdrawn from the next phase of the project, they will be kept abreast of developments should they wish to rejoin at a later date."
Campaign broke the news that publishers were discussing joint ad sales last May as print ad revenues slumped by nearly 20 per cent and advertisers shifted money into Facebook and Google.