The surprise announcement dealt a blow to German Chancellor Angela Merkel, on a visit to Washington, and who had backed the move to sell Opel to a Canadian-led venture as the best way of saving jobs in Germany.

GM said in a statement its board made the decision because of "an improving business environment for GM over the past few months, and the importance of Opel/Vauxhall to GM's global strategy."

It said the GM board "has decided to retain Opel and will initiate a restructuring of its European operations in earnest."

The announcement is the latest twist in a saga which has led to months of uncertainty for Opel after the struggling US auto giant GM underwent a government-backed bankruptcy reorganization.

The European unit, which was to be shed under the plan, turned into a major polemic involving US and European governments which clashed over which portions of the automaker would be saved and what types of aid would be offered.

GM said it now believes keeping Opel and restructuring the European division itself would be the most cost-effective solution.

"GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration," said Fritz Henderson, president and chief executive.

"We understand the complexity and length of this issue has been draining for all involved. However, from the outset, our goal has been to secure the best long term solution for our customers, employees, suppliers and dealers, which is reflected in the decision reached today.

"This was deemed to be the most stable and least costly approach for securing Opel/Vauxhall's long-term future."

Henderson said the restructuring costs have been estimated at three billion euros (4.4 billion euros), "significantly lower than all bids submitted as part of the investor solicitation."

"GM will work with all European labor unions to develop a plan for meaningful contributions to Opel's restructuring," he added.

"While Opel continues to outperform against its viability plan assumptions and immediate liquidity is stable, time is of the essence."

GM had given preliminary approval to plans to sell a 55 percent stake in German-based Opel to Canadian firm Magna and its Russian partner Sberbank.

European Union regulators last month cast doubt on the deal, saying there were "significant indications" that German aid of 4.5 billion euros (6.6 billion dollars) for the deal had been proffered only if Magna and Sberbank won the bid, which had been bitterly contested.

The latest news was unlikely to end the polemic. One of the first to react, Roland Koch of the German state of Hesse, said he was "dismayed" that "months of efforts to find the best solution failed."

Koch said he was concerned now "about the future of the company and its employees," and said he hoped GM would repay state aid already given by November 30.

GM's announcement came just as Merkel left Washington, where she held talks with President Barack Obama and addressed the US Congress.

Merkel's government had backed Magna's offer as embodying the best future for 25,000 workers on its territory.

The saga has dragged on since February, with the fate of at least 10,500 of GM Europe's workforce of around 50,000 hanging in the balance.

That is the number of jobs Magna said it would cut, while GM is believed set to eliminate more as part of its restructuring.

Berlin had asked other European countries to contribute to the rescue package as well.

In October, a GM executive pushed back the signing date again and a press report said GM wanted to hang on to the company.

GM's finances since its bankruptcy reorganization have not yet been reported. But on Tuesday it said US sales were 177,603 new vehicles in October, up four percent from a year ago, the company's first year-over-year gain since January 2008.