According to reports, the cable operator is set to reveal the decision later this week, ahead of a public announcement that merger talks with rival cable operator NTL have begun.
BSkyB was the frontrunner in the race for Flextech, offering over £1bn for the business, comprising channels Living TV, Bravo, Challenge and Trouble, which feature programmes such as the top-rated 'Alias' and 'Will & Grace', and a 50% stake in nine UKTV channels with the BBC.
The decision not to sell the business to Sky is understood to be down to the satellite broadcaster's positioning as a fierce rival to cable in the pay-TV market.
The BBC, which has a considerable influence in who Flextech's buyer might be because of its 50% stake in UKTV, was also said to be against Sky winning the race, due to its interest in Freeview, which competes directly with Sky.
The decision to call off the sale will vindicate City analysts and ITV chief executive Charles Allen, who said a number of weeks ago that Telewest's proposed sale of Flextech was an elaborate stunt to value the business before the merger.
Last week, ITV was told by investment bank Deutsche Bank, which is conducting the sale of Flextech, that it had failed to make it through to the second round of bids.
Private equity groups were ruled out of the running because Telewest is only interested in trade buyers that will bring content, channels and cross promotion to the Flextech group of channels.
German broadcaster RTL, which owns Five, was believed to be in the running to scoop the business, although it was outbid by Sky.
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