His move comes after Brazilian state development bank BNDES backed out of supporting the deal.
Carrefour's French rival Casino, which owns a major stake in Grupo Pao de Acucar, had also opposed the deal.
Brazil's fast-growing grocery sector is seen as a big investment opportunity.
Despite Mr Diniz suspending the merger plans, analyst Natalie Berg from Planet Retail said it left Casino in a difficult position.
"There is not really a winner here, as Casino is stuck with a partner whose interests are obviously elsewhere," she said.
The deal's suspension comes as Carrefour continues to seek to expand its global operations to offset a weak French retail sector.
'Resilient' tradingCarrefour, which has issued three profit warnings in the past year, reported a slight fall in quarterly global sales on Tuesday.
Its worldwide like-for-like sales excluding petrol in the three months to 30 April were 0.2% lower than a year earlier.
By contrast, like-for-like sales growth at its Brazilian operations were up 10%.
"Our sales performance was resilient in Western Europe and strong in Latin America and Asia," said Lars Olofsson, Carrefour's chairman and chief executive.
Carrefour has had a presence in Brazil since 1975, and has more than 500 outlets including those of its Atacadao cash and carry brand.
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