Drugmakers Pfizer Inc and Allergan Plc will mutually terminate their merger early Wednesday morning, according to a source familiar with the matter.

Earlier on Tuesday, Reuters reported that Pfizer was leaning towards abandoning its $160 billion agreement to buy Allergan in light of the US Treasury's new measures to curb such tax-evading deals.

The US Treasury Department had taken fresh steps on Monday to curb tax-driven corporate inversions whereby companies seek to slash their tax bills by redomiciling overseas, though their core operations and management usually remain in the United States even as they claim a new tax home.

Pfizer was not willing to change the terms of its deal with Allergan which, under the new tax rules, would no longer benefit from the move to Ireland.

CNBC first reported on the termination of the deal late Tuesday. – Reuters