In a letter to Sri Lanka's Board of Investment (BOI), dated Wednesday, Adani said that while it respected the government's position, it had decided to "respectfully withdraw" from the project.
The move followed a decision by President Anura Kumara Dissanayake's administration to revoke a power purchase agreement with Adani Group to negotiate lower energy costs.
Dissanayake's party had strongly criticised the Adani deal as "corrupt" and wanted it renegotiated.
Adani told the BOI that it had spent about $5 million on "pre-development activities" relating to the proposed 484-megawatt plant on Sri Lanka's north-western coast.
"As we bow out, we wish to reaffirm that we would always be available for (the) Sri Lankan government to have us undertake any development opportunity," Adani added.