"While we remain confident in Expedia's long-term prospects and will continue to be net buyers of our shares, the terms available to us in the current debt market environment were simply unacceptable," Diller, who is chairman of the board, said in a statement.
Expedia stock fell more than more than 8 percent , its biggest slide in 14 months.
Easy access to credit helped fuel the private equity buyout boom and has encouraged companies like Expedia and Home Depot
But financial conditions are tightening, as investors shy away from risk amid the subprime mortgage meltdown and a slowing U.S. economy. The junk bond market has been particularly hard hit.
Since Expedia originally announced its buyback on June 19, at least six companies have pulled junk bond sales. So far this month, U.S. companies have sold just $708 million of junk bonds, the slowest pace for any July since 1994, according to Dealogic.
Borrowing costs have also climbed as investors demand more yield for the risk of holding junk bonds. Average yields on junk bonds had risen to 8.36 percent as of Friday, up from 7.73 percent on June 19 when Expedia announced its buyback.
The extra 0.63 percentage point of yield means a junk-rated company on average would have to pay an extra $6.3 million of interest a year for every $1 billion of debt borrowed.
Expedia said it would buy back a maximum of 25 million shares at a price between $27.50 and $30 per share. In June, it announced a plan to buy up to 116.7 million shares, or more than one-third of those outstanding, in the same price range.
The reduced buyback will cost the company about $720 million, compared with the original plan to spend about $3.35 billion.
Expedia said it plans to finance the current buyback through its existing credit facility.
Expedia's original buyback plan had met with resistance from some investors. Morningstar analyst Sumit Desai, at the time, advised investors against accepting the offer, while credit rating agency Standard & Poor's lowered Expedia's rating to junk status on the plan.
Diller, a former movie studio boss and chief executive of Expedia's former parent IAC/InteractiveCorp.
Expedia also said on Monday that it expects second-quarter revenue, boosted by 14 percent transaction growth, to exceed Wall Street expectations.
Wall Street analysts were expecting Expedia to post revenue of $647.7 million in the quarter, according to Reuters Estimates.
Expedia shares were down $2.55 at $26.84 in midday trading on Nasdaq.