Gulf Oil Corp. yesterday dropped its $5.13 billion offer to buy Cities Service Co., saying that it could not overcome the Federal Trade Commission's antitrust objections to the proposed merger.

Cities Service, which had solicited Gulf's bid to avert a takeover offer from Mesa Petroleum Co., said it was "astounded" by Gulf's action. "There is absolutely no reason or basis for Gulf reneging on the agreement," the company said in a statement from its headquarters in Tulsa, Okla. Lawyers familiar with the merger predicted that Cities would sue Gulf, contending Gulf hadn't tried hard enough to overcome the FTC's objection.

Wall Street analysts said the collapse of the proposed merger would inflict losses of hundreds of millions of dollars on Wall Street speculators who had gambled that the merger would go through and they would be able to sell their stock for $63 a share, the price offered by Gulf.

Cities stock dropped $6.75 to $37.25 yesterday before the announcement was made, and could plunge to $30 or lower when it opens Monday, Wall Street analysts said. Cities has 77.9 million shares outstanding, so calling off the merger reduces the value on paper of the outstanding Gulf stock by $2.5 billion.

The losses could be particularly heavy for Wall Street brokerage houses whose professional risk takers bought Cities Service stock after the price started to rise in anticipation of the merger. Financial market sources said most major Wall Street firms had sizable holdings in Cities Service and could sustain large losses. They speculated that losses on Cities Services triggered widespread selling of stocks and contributed to this week's plunge in the stock market.

Gulf, seeking additional domestic oil and gas reserves, made its offer for Cities Service in June, when Cities was locked in a complicated takeover battle with Mesa Petroleum Co. Mesa dropped its bid in the face of Gulf's offer, and signed an agreement not to make another attempt to purchase Cities for five years.

In its statement, Cities implied that it would try to cushion the effects of the stock's nosedive, saying it was working with financial and legal advisers to "develop alternative plans to achieve the best results for its shareholders." It did not elaborate.

Gulf, the nation's sixth-largest oil company, said in a statement that it was terminating its offer for Cities because it had been unable to negotiate a settlement of the FTC's objections. Gulf and the investment community apparently were surprised by the ferocity of the FTC's opposition, in the wake of several oil company takeovers in the past two years.

Gulf said it had made "detailed proposals" to the commission in negotiations over the past two weeks, but that "it has become clear that the FTC is unwilling to accept the Gulf proposals."

The FTC, however, denied Gulf's charges.

"We sought to negotiate every item capable of negotiation and it was Gulf that described certain areas as nonnegotiable and did so repeatedly in connection with the sale or divestiture of refineries," said FTC general counsel John H. Carley.

The FTC had objected to Gulf's offer for Cities on the grounds that the merger would restrict competition in gasoline marketing and in the distribution and production of jet fuel in the Southeast and East Coast.

The agency also was disturbed that the merger would give Gulf virtual veto power over the affairs of the Colonial Pipeline, which is owned by a consortium of oil companies and carries about half the petroleum products shipped between the Gulf Coast and markets in the Northeast.

The commission had won a temporary restraining order against Gulf's offer and was seeking a preliminary injunction to block the merger from taking place.

Gulf, in its statement, claimed that the FTC was demanding that it either sell Cities Services' only refinery, in Lake Charles, La., or a Gulf refinery, and make other divestitures of Cities Service property to overcome the antitrust issues.

"The FTC's settlement demand would involve very substantial costs to Gulf by reason of the divestitures and associated expenses which make the acquisition unacceptable from a financial standpoint," the Pittsburgh-based company said in its statement, adding that the FTC's settlement demands would have had "substantial adverse consequences to Gulf."

Cities Service, in its statement, said it had told Gulf it would accept a reduced offering price to make up for the cost to Gulf of divesting assets.

FTC sources said yesterday that the two settlement offers made by Gulf did not come close to offering an acceptable compromise.

One agency lawyer said Gulf had proposed a three-year plan to limit price increases on jet fuel to alleviate one major concern about possible effects of the merger. Sources said the FTC found that proposal unacceptable because it would last for only three years and because jet fuel puchased at the refinery usually is cheaper than jet fuel bought at the airport.