The supermarket group's deputy chief executive, Tim Mason, who heads the loss-making US Fresh & Easy chain, is to quit the company after 30 years.
The UK's biggest retailer confirmed on Wednesday it was launching a "strategic review" of the US business. The chief executive, Phil Clarke, who took over from Sir Terry Leahy last year, said that while all options were under consideration it was "likely, though not certain" that Tesco will quit the US entirely.
He said it was clear Fresh & Easy "will not deliver acceptable shareholder returns on an appropriate timeframe in its current form".
The group had in recent months received "a number of approaches" from parties interested in buying all or part of Fresh & Easy, or in partnering with Tesco to develop the business. He promised an update when the group presents its full-year results in April.
Mason, once seen as a candidate to replace Leahy, will quit the group immediately. Clarke said he had "played an important part in our success over a 30-year career with the company, and he leaves with my thanks and good wishes".
News of the end of Tesco's American dream came as the group reported another disappointing set of sales figures. Underlying sales in the UK fell by 0.6% in the third quarter, with Clarke describing the performance of the general merchanside division as "not good enough". Its figures lag well behind rival Sainsbury's, which recently reported a 1.7% increase and has been gaining market share.
Despite the gloomy trading news, Tesco shares jumped 4% on Wednesday morning to 340p as analysts welcomed the US move.
Unions in the US expressed anger over the fate of Fresh & Easy, which they said could have been avoided. Pat O'Neill, United Food and Commercial Workers union vice-president, said: "Thousands of Tesco workers at Fresh & Easy stores in the US now face their holiday season filled with uncertainty and fear over whether their jobs and their stores will be there in the new year.
"These job losses could have been avoided if Tesco had chosen to engage with community stakeholders and its customers to address the many underlying problems and warning signs of the troubled Fresh & Easy model."
He called on Tesco to include all community and labour stakeholders in the review process.
Tesco had hoped to build Fresh & Easy into a business as big as its core UK chain. The first Fresh & Easy opened amid much fanfare five years ago and there are about 200 stores in southern California and Nevada.
But Tesco's plans were far more ambitious. Within weeks of the first store opening, in Hemet, east of Los Angeles, Fresh & Easy bosses were voicing ambitions to have 1,000 stores across California and then taking Fresh & Easy to the east coast.
The retailer built a vast warehouse, complete with America's biggest expanse of solar panels to help power it, and a food factory next door to make the ready meals that UK shoppers buy by the million but were almost unknown in the US.
The plans came after two years of intensive research that involved Tesco sending senior executives from the UK to live with Californian families, assess the way they shopped and ate, and to build secret test stores.
But their research proved faulty. Almost every aspect of the shops, from their interior decoration to the pack sizes and self-serve tills have been changed.
Fresh & Easy also opened as the subprime mortgage crisis and subsequent economic downturn took hold, hitting US consumer confidence and spending power.
