By Alexander Kolyandr 

MOSCOW--OAO Rosneft's planned acquisition of Morgan Stanley's oil-trading and storage business has collapsed after the companies failed to win regulatory approval, amid tensions between the governments of the U.S. and Russia.

Sanctions-hit Rosneft, Russia's largest oil company, and the U.S. bank said the deal won't go ahead "due to an objective impossibility to complete the deal that has arisen as a result of regulatory clearances being refused."

"Having invested substantial efforts in the deal, the parties regret that it could not be completed", the companies said in a release Monday.

Morgan Stanley said it would now consider a variety of options for the unit that take into account the interests of its shareholders, clients and employees.

Morgan Stanley warned in October that the December 2013 deal could fall apart as all necessary approvals needed to be received by year-end.

"In the current environment there can be no assurance that the transaction will close, especially in light of the existing contractual requirement that all necessary approvals be received by year-end," a Morgan Stanley spokesman said in a statement at the time. Previously, Morgan Stanley had said it planned to close the deal in the second half of the year.

Rosneft Russia's most indebted company, is subject to Western sanctions and faces restrictions on acquiring certain technologies and raising capital in the West.

In April, officials added Rosneft President Igor Sechin to a sanctions list that restricts travel and freezes assets.

Write to Alexander Kolyandr at Alexander.Kolyandr@wsj.com

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