LONDON--Kazakhstan's state-owned oil and gas company KazMunaiGaz, or KMG, said on Monday it is withdrawing its proposed offer to take its listed exploration unit private, blaming oil price volatility and the inability to agree an acquisition price.

Oil prices have more than halved since June 2014, and while analysts and industry executives expect a surge in merger activity this year, the volatility in share prices has already derailed some potential deals.

KMG's offer, which was announced in July, was a critical step toward the Kazakh government floating the entire company, a goal the government and senior KMG officials have underscored repeatedly in recent years.

KMG, Central Asia's largest oil and gas company, has a stake in the giant Kashagan oil field, which remains out of commission because of pipeline leaks despite more than $50 billion in spending. Western oil majors, including Exxon Mobil Corp., Royal Dutch Shell PLC, Eni SpA and Total SA, also have stakes in Kashagan.

In July, KMG proposed to buy the 37% of KMG EP it didn't already own for $18.50 a share. The offer represented a 15.1% premium to KMG EP's share price on July 21.

KMG officials had been hoping to reintegrate the exploration subsidiary for several years in an effort to simplify the parent company's balance sheet and operations in advance of a potential initial public offering, likely in London, people familiar with the matter have said.

KMG said Monday it will continue to support the development of KMG EP.

"KMG continues to believe that the reintegration of KMG EP into KMG remains a sensible strategic goal for all shareholders," it said.

KMG EP produced around 250,000 barrels of oil a day in 2013, but its production has stagnated for years while the company's reserves base has shrunk since 2008.

Write to Selina Williams at selina.williams@wsj.com

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