(Fixes spelling of Allen & Overy in final paragraph)
* PPG ditches offer after three-month pursuit
* Akzo must now deliver on promises
* PPG cannot make another approach for six months
By Toby Sterling
AMSTERDAM, June 1 (Reuters) - U.S. paints and coatings maker PPG Industries has dropped its attempt to buy Dutch rival Akzo Nobel in a 26.3 billion euro ($29.5 billion) deal, stung by repeated rejections from the company, legal defeats and hostility from Dutch politicians.
Although it has retained its independence, Akzo must make good on promises it made to appease shareholders unhappy after it refused to enter talks with Pittsburgh-based PPG.
Once PPG's interest became known in March, Akzo set higher performance targets, promised 1.6 billion euros in extra dividends and unveiled plans to sell or float a chemicals subsidiary, which represents a third of company sales and profits.
Akzo Nobel shares traded down 0.2 percent at 74.34 euros at 1310 GMT -- far below the figure of around 95 euros per share that PPG's final cash and share proposal in April represented.
PPG called off its pursuit on Thursday after almost three months.
"We believe it is in the best interests of PPG and its shareholders to withdraw our proposal to AkzoNobel at this time," PPG CEO Michael McGarry said in a statement.
PPG may not approach Akzo again during a six month cooling-off period.
In arguing against a PPG takeover, Akzo said it would be bad for employees, that the companies' cultures did not mesh, and that a deal would face antitrust risks.
The timing did not help PPG, coming a week before national elections on March 15. With concerns over the impact on Dutch jobs, Economic Affairs Minister Henk Kamp branded a takeover as "not in the national interest."
Akzo CEO Ton Buechner said on Thursday he believes the company's new strategy will lead to a "step change in growth and long-term value creation for our shareholders and all other stakeholders."
He said the company was committed to "an open and constructive dialogue with our shareholders and all other stakeholders."
That follows a court ruling on Monday in which a judge ordered the company to communicate better with its shareholders, without specifying how.
A group of institutional shareholders representing about 18 percent of the company's investor base and led by hedge fund Elliott Advisors lost a bid at the Amsterdam Enterprise Chamber on Monday to force Akzo's boards to engage in talks with PPG.
Elliott declined comment on Thursday.
Henderson Global, which holds a 0.77 percent stake in Akzo and had urged the company to engage in talks, said the result was "sadly all too predictable."
"The small gene pool continues to do its worst on Dutch supervisory boards," said John Bennett, head of European equities. "The Dutch discount is here to stay".
Investors often say that Dutch companies appear cheap, but that they trade at a discount to peers because many have poison pill defences that lessen the possibility of a hostile takeover.
Michael Wegener, Managing Partner at Case Equity Partners, who had invested around 6 percent of his fund in Akzo shares after PPG's interest became known in March, said he is now carefully considering next steps.
Akzo shares stood at 64.42 on March 8 before news of an approach broke.
"The share price is holding up astonishingly well," said Wegener.
The PPG approach may lead to more overt government influence over takeover battles.
CEO Buechner argued in interviews that Dutch multinationals were part of the country's vital infrastructure, as they account for a disproportionate amount of R&D spending.
Since then the cabinet has proposed a law that would give listed Dutch companies a one-year period in which managers may decline to engage in talks with a prospective foreign buyer, with no need to justify themselves to shareholders.
A parliamentary commission was meeting later Thursday to hear that plan and other ideas, including the creation of a government panel with the power to block unwanted foreign takeovers.
Akzo was advised by Lazard, HSBC, and law firm De Brauw, among others. PPG was advised by Goldman Sachs and Allen & Overy. ($1 = 0.8909 euros)
Reporting by Toby Sterling, Bart Meijer and Maiya Keidan.; Editing by David Goodman/Keith Weir