Although the move was backed by Surrey Ambulance chiefs, it was opposed by every other key NHS player.
On Tuesday, Junior Health Minister Hazel Blears announced that the controversial plans were being dropped after public consultation showed that almost every organisation involved was against the idea.
Local MP Virginia Bottomley, who campaigned against the merger, said she "welcomed the decision".
"The government has now decided to respect local opinion and leave current arrangements in place," she said.
Haslemere's Surrey county councillor Christine Stevens said she was was "absolutely delighted".
"I am glad it is not the mishmash that was proposed. I am very glad that local opinion was heard and that there is a commitment to maintain local responsive services," she said.
Hampshire NHS Ambulance Trust was also against the merger and rejected plans last year believing that it would be "detrimental to both residents and staff".
While Russell Kempton, control room manager for Surrey Ambulance Service, which supported the merger ,said it was "a bit disappointed" but that the Surrey Ambulance Service Board "was pleased that a decision had finally been made".
As one of the smallest ambulance trusts, Surrey had hoped the merger would go ahead and free up millions of pounds for frontline services.
It had also said that the trust would have preferred to merge with Hampshire because a merger with Sussex could mean the county being reclassified as a rural service with less demanding response times.
But on Tuesday, a spokesman said that the Surrey Ambulance "welcomed the opportunity to continue with the innovative work that is already being carried out and to enhancing its reputation as a progressive, achieving ambulance service serving the population of Surrey and Mid Hampshire".
Other bodies including Community Health Councils in both Surrey and Hampshire wrote a joint letter objecting to the merger plans.
A consultation on the proposed mergers of ambulance trusts throughout the South East ended in October last year and there was anger when health authority bosses agreed the mergers with head of the regional NHS Ruth Carnell.
But changes to the health service brought a rethink with the announcement earlier this month of plans to create new Strategic Health Authorities and their Primary Care Trusts among them, Surrey and Sussex.
That was key to the merger plans being scrapped because it involved devolving power to frontline NHS staff.
It will now be up to the new strategic health authority and the county's primary care trusts to review the ambulance service and put forward plans by September.
Making her announcement Hazel Blears said: "We've taken on board the views of local people and the planned changes to ambulance services in the South East will not go ahead. This was a real consultation exercise - plans have changed as a result of the views of local people."
The minister also announced that the government was investing £3.4 million nationally for new state-of-the-art satellite tracking and navigation systems to help all ambulance trusts meet response targets of 75 per cent of life-threatening calls within eight minutes.
Mrs Bottomley said the extra money was "welcomed".


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