"Investors just baulked," one portfolio manager who had been looking at the deal told IFR.
"If something dire does come out the suit, then that could mean that the deal has to be nullified anyway - so it was just better to pull it."
Shares in Barclays traded sharply lower on Thursday morning in London, down some 4 percent in early deals.
Investors said the bank was pushing for a US$1.5bn transaction at a price of 180bp over Treasuries before news of the suit emerged.
"After seeing what happened to BNP Paribas and Credit Suisse, the concern is that no one knows exactly what the suit is about, in terms of just how deep it goes and if it will lead into something else," the manager said.
Read MoreNew York attorney general sues Barclays
Barclays is reportedly to be sued on allegations that the bank's dark pool - a private trading platform - gave high-frequency traders systematic advantages over other traders.
The fact that investors immediately pulled back from the deal underscored how concerned accounts are about how hard US authorities are penalising European banks.
Subordinated European bank bonds are one of the most sought after products in the corporate bond market, because of their much higher yield than senior unsecured notes.
Had it priced at 180bp, the new bond would have locked in a spread some 20bp tighter than initial price thoughts and offered no new issue premium - an extremely good funding result for the bank.
Investors often fight for subordinated notes in particular, believing that if the bank goes under, there will be very little distinction between the recovery value of subordinated versus senior debt.
"If you believe the credit story, you may as well get paid for it and buy the subordinated bonds," said one buy-side bank analyst.