LMVH, the world's leading luxury group which owns Vuitton and is controlled by France's richest man, Bernard Arnault, has been at loggerheads with its smaller rival for four years.
In a surprise announcement, LMVH said it would relinquish most of its stake - worth almost 23.2 per cent - in the company and not to acquire any more shares in Hermes for five years.
It effectively buried the possibility that LVMH could make a full takeover bid for the 177-year-old maker of Birkin and Kelly handbags.
Shares in Hermes closed down 3.5 per cent in Paris on Wednesday, after a 'speculative premium' on its stock based on the possibility of a takeover disappeared.
LVMH agreed to redistribute its stake in Hermes to its shareholders, ending four years of legal warfare between the luxury titans, dubbed the "handbag war" by the press.
LVMH's brands include Christian Dior and Dom Perignon. They had built up a 17 per cent stake in Hermes in 2010 which they did not have to declare.
Hermes, one of France's last major independent luxury group still controlled by the founding family, vehemently protested at its main rival's activities.