The Italian-American automaker swiped left due to concerns about the merger's over-reliance on Europe, and how the acquisition would be funded.
The PSA Group reportedly approached Fiat Chrysler (FCA) about a merger as early as this year's Detroit motor show in January, only to be rebuffed by the American-Italian company.
According to the paper's sources, senior executives at FCA kiboshed the proposal as it would it lead to the automaker being even more reliant on the European market.
The Agnelli family, which owns a majority of the automaker's voting rights, was also unhappy about how the PSA Group would fund the deal.
As the PSA Group is still heavy with debt it took on to buy Opel and Vauxhall from General Motors, it proposed to fund the deal primarily via shares, with the Agnelli family set to own a significant proportion of the merged automaker.
Neither automaker has responded to the report.
Both companies have previously gone on the record about their willingness to pursue partnership and merger opportunities.
At the recent Geneva motor show, Carlos Tavares, CEO of the PSA Group, said he would "love to [have discussions] with people who are looking for deals".
The Peugeot family, which is one of the automaker's three major shareholders, has indicated it is willing to back another acquisition as the company has managed to turn around Opel/Vauxhall faster than expected.
Another potential target for PSA is Jaguar Land Rover, which has dramatically cut its workforce and is swimming in red ink thanks to Brexit woes, slumping demand for diesel cars, and a sales crash in China.
Also in Geneva, Mike Manley, Fiat Chrysler's CEO, said the company is "very open" to working with other manufacturers in "any deal that would make Fiat stronger".