AirAsia X will pull out of Europe at the end of March, ceasing flights from Gatwick and from Paris to its hub at Kuala Lumpur.
The carrier blamed falling demand in Europe, the high oil price and the added costs of UK Air Passenger Duty (APD) and the European emissions trading scheme (ETS).
AirAsia X only switched service from Stansted to Gatwick in October. Its last flight from London will operate on March 31.
Passengers with advance bookings from Gatwick will be offered the choice of a full refund or switch to an alternative carrier.
AirAsia X will continue to operate between Kuala Lumpur and Australasia, China, Japan, Korea and Taiwan.
Chief executive Azran Osman-Rani said: “Weakening demand for air travel from Europe brought about by the current economic situation, together with exorbitant government taxes, have placed cost pressures on operating long-haul low-cost flights.
“The emissions trading scheme and escalating APD, which will rise again in April, have forced our decision to withdraw services to Europe.”
Osman-Rani added: “We intend to concentrate capacity in our core markets.” He promised new routes within these markets.
Gatwick Airport expressed disappointment. A spokesman said: “AirAsia X has made the reasons behind its decision clear.
“As a founding member of the Fair Tax on Flying Alliance, Gatwick is campaigning for the cost of the Emissions Trading Scheme to be offset against those of APD in the March 2012 Budget. We believe the Treasury must pay far closer attention to the impact of this issue.
“The decision by AirAsia X is clear evidence that the burden of additional taxation is a material consideration for long haul airlines flying to the UK.”
AirAsia X began flying to London in March 2009.