The proposed merger of Borg-Warner Corp. and the Firestone Tire & Rubber Co.-which would have been one of the largest corporate mergers in U.S. history-was called off in a joint announcement from the two companies yesterday.

The action came after Firestone's directors called for a higher initial payout to Firestone stockholders at the outset of the deal.

Borg-Warner Chairman and Chief Executive Officer James F. Bere said "the Firestone proposal simply asks more than we feel it is prudent for our shareholders to pay."

Borg-Warner, the smaller of the two companies with $2.3 billion in sales, nevertheless would have been the obviously dominant company in the merger under the original terms, which were announced last November at a time when Firestone was in the midst of troubles with one ofits top tire lines, the steel-belted Radial 500.

Firestone, the 48th largest industrial company in the United States with $4.8 billion in sales, according to Fortune magazine, last year wrote off more than $200 million in losses on the basis of projected costs of a recall of several million 500s based on negotiations with government tire safety regulators who said the tires were unsafe.

Industry sources say that Firestone's losses were probably much less than the company projected publicly, and now the company was trying to change the terms of the deal to reflect its stronger financial standing.

"Our board felt that the changes in conditions since the time the proposal was first made justified a signicant rate for the (Borg-Warner) convertible preferred stock," said Firestone Chairman and Chief Executive Officer Richard A. Riley. Firestone stockholders were to be given that stock in exchange for their Firestone shares.