* Carillion ends pursuit of merger with Balfour Beatty
* Balfour to go ahead with turnaround strategy
* Will also press on with sale of Parsons Brinckerhoff (Adds Carillion statement, updates shares)
By Li-mei Hoang
LONDON, Aug 20 British construction company Carillion said it had abandoned its pursuit of a merger with Balfour Beatty on Wednesday after Balfour rejected its advances for the third time.
Balfour said its board had unanimously decided that Carillion's sweetened offer was not in the best interests of its shareholders and did not address its concerns over the sale of its U.S. engineering business.
The company said its turnaround strategy, centred on the sale of its U.S. engineering business, was a better prospect for investors.
Shares in Britain's Balfour were down 7.9 percent at 236 pence by 1454 GMT, making it the biggest loser on the FTSE 250 index. Carillion's shares were also down, by 2.2 percent at 329 pence.
Carillion made its third offer on Tuesday, a sweetened all-share approach valuing its rival at 2.1 billion pounds ($3.5 billion), in its attempt to create a British construction giant with 80,000 staff around the world.
Two analysts and an investor told Reuters on Tuesday they expected Balfour to open talks with Carillion, but the group said on Wednesday that its board had unanimously rejected the offer.
"This is increasingly looking like an opportunity about to be missed by Balfour Beatty as far as we can see. The share price will no doubt reflect that over the coming months," said Whitman Howard analyst Stephen Rawlinson.
Carillion has said the new terms were equivalent to a 36 percent premium to the price at which Balfour shares traded before news of a possible merger leaked.
Balfour said on Wednesday that it was concerned about Carillion's plans to keep Parsons Brinckerhoff, the U.S. design and engineering firm Balfour wants to sell, and to reduce its UK construction business.
Balfour is trying to refocus itself as an Anglo-American construction and specialist services group after a difficult 18 months marred by profit warnings and the departure of its chief executive, Andrew McNaughton.
The company expects to return 200 million pounds to shareholders following the sale of Parsons Brinckerhoff, which it says does not fit with the rest of its U.S. construction and infrastructure support services operations. The United States accounts for around 16 percent of group revenue.
Numis Securities analyst Howard Seymour, who has a "hold" rating on both stocks, said Balfour's rejection of Carillion's offer indicated it had the backing of shareholders.
"Balfour is saying on a standalone basis that they are happy with what they are doing ... You feel like they must have shareholder support to be so unequivocal to say we are walking away from this deal," he said.
Carillion's third approach offered Balfour shareholders a 58.3 percent share of the combined firm and a cash dividend of 8.5 pence per share.
It said that would value Balfour at 2.1 billion pounds, compared with its previous offer of 1.9 billion pounds.
Balfour, which is still searching for a new group chief executive after McNaughton's departure in May, said it would not be seeking an extension to the takeover deadline of Aug. 21, which Carillion requested on Tuesday.
($1 = 0.6021 British Pounds)
(Editing by Erica Billingham and Pravin Char)