The United Arab Emirates-backed consortium that proposed a £600m takeover of the Telegraph group is walking away after it said new legislation meant the acquisition was “no longer feasible”, triggering a fresh auction of the newspaper group.

The decision by RedBird IMI – a partnership backed by Sheikh Mansour bin Zayed al-Nahyan, the UAE’s vice-president, and the US investment firm RedBird Capital Partners – puts the newspaper group back up for sale, with several high-profile suitors expected to bid.

RedBird IMI effectively took control of the Telegraph newspapers and the Spectator magazine in December when it repaid owner the Barclay family’s debts, including a £600m loan against the titles.

But RedBird IMI confirmed it was walking away because the British government published legislation that will block foreign states or associated individuals from owning newspaper assets in the UK. RedBird IMI’s deal had been seen as dead in the water since the legislation was formally proposed last month.

The planned RedBird IMI takeover of the Telegraph, widely seen as the house journal of the Conservative party, had been fiercely opposed by many Tory MPs and peers who raised concerns about free speech.

The UAE, which provides the financial backing for 75% of RedBird IMI, has been criticised in the past for breaches of press freedom. The concerns prompted the government to draw up the legislation, which is expected to become law in the coming weeks.

Last year’s auction for the Telegraph attracted interest from more than 20 parties but was halted after RedBird IMI made its proposed offer. There is now expected to be fierce interest from potential bidders including from Daily Mail and General Trust, and Paul Marshall, the hedge fund founder and backer of GB News. The Rupert Murdoch-owned News UK has shown interest in acquiring the Spectator.

RedBird IMI said: “Our ownership would have seen the strongest editorial protections ever put forward for a UK newspaper, along with much-needed investment.

“We continue to believe this approach would have benefited the Telegraph and Spectator’s readers, their journalists and the UK media landscape more widely.

“Regrettably, it is clear this approach is no longer feasible. Our focus now is on providing certainty to the employees and readers of the Telegraph and the Spectator, and securing best value for the assets, which remain highly attractive.”

The company said it had held “constructive” discussions with the government about ensuring a smooth and orderly sale of the titles.

RedBird IMI holds £600m of debt that was previously owed by an indirect holding company of the Telegraph and the Spectator to Lloyds Bank, and owns an option to acquire the shares in the companies holding the Telegraph and the Spectator.

RedBird IMI is being advised by the banks Raine and Robey Warshaw, which employs the former chancellor George Osborne, in the sale process.

Lucy Frazer, the culture secretary, has lifted a regulatory order imposed last year which put the RedBird IMI deal on hold pending regulatory scrutiny. Her decision allows RedBird IMI to sell on the option to acquire the Telegraph group.

It is possible that the Telegraph and Spectator will be sold separately. The Barclay family remain shareholders in the titles but have no role in the running of the newspaper group. IMI is a lender to a holding company of Very Group, a retailer which is the last part of the Barclays’ once sprawling corporate empire. IMI is also considering an auction of Very Group, the Times reported.

Frazer said:“The parties have signalled their intention to withdraw from the deal. Throughout this process I have raised concerns about the potential impact of this deal on free expression and accurate presentation of news, and I took steps to ensure that media freedom was protected while there was an investigation into those concerns.

“I will now allow the parties to conduct an orderly transition and I will monitor the outcome with a view to taking any further regulatory action as required under the Enterprise Act.”