In a statement, the maker of Hershey's Kisses and Reese's Peanut Butter, said it turned down the offer after determining "that it provided no basis for further discussion between Mondelez and the company."
Hershey said Mondelez, the maker of Oreo cookies and Cadbury chocolate, offered it $107 a share in cash and stock — a 10 percent premium to its closing stock price ahead of the deal. The offer also included other "non-monetary conditions."
Earlier Thursday, people familiar with the matter told CNBC that Mondelez had pledged to protect jobs following any deal and to locate its global chocolate headquarters to Hershey, Pennsylvania, and rename the combined company Hershey.
Those overtures were seen as critical to paving the way to a potential transaction, given past failed attempts by others to acquire Hershey.
Talks between Hershey and Mondelez have been ongoing, these people said.
Hershey's shares hit a 52-week high intraday and was recently trading up $17.86, or 17.4 percent at $114.55. With the stock trading higher than the speculated offer price, it is likely investors are betting Mondelez could sweeten its offer, or another suitor could appear.
Some observers suspected Mondelez was seeking the combination so that it could remain an independent company and not become an acquisition target itself.
Mondelez has been under pressure from activist investor William Ackman, who has pushed for the company to either grow revenue faster or sell itself to a rival.
One proposed acquirer is Kraft Heinz, a food company whose controlling shareholders are 3G Capital and Berkshire Hathaway.
Word of Mondelez's proposed deal sent shares of other food companies higher Thursday, as investors began to see those companies becoming an alternative target for Kraft Heinz. Among them were shares of Kellogg, which were recently trading 6 percent higher, and General Mills, which gain 5.7 percent.
But with Hershey rejecting Mondelez's preliminary offer, that could be in doubt.
Any acquisition of Hershey is complicated by the fact that deals need to be approved by the trust that controls Hershey through a special class of stock. The Hershey Trust, which was established by Milton Hershey and his wife Catherine in 1905, owns 8.4 percent of the company's common stock, but it controls 81 percent of its voting power.
In 2002, the William Wrigley Jr. Company made a failed attempt to acquire Hershey for $12 billion, people close to the negotiation said at the time.
Wrigley's offer followed a decision by the Hershey Trust to explore a sale as a way to diversify its holdings. But talk of a sale prompted a loud public outcry. Groups including former students of the Milton Hershey School, the trust's beneficiary, and local residents opposed any deal at that time, even going so far as to seek an injunction blocking any proposed deal.
The trust had received other offers beyond Wrigley, among them Nestle and Cadbury Schweppes, those familiar with the transaction said at the time. In the years since, Wrigley was acquired by the privately held Mars, the maker of M&M's, and Cadbury was acquired by Kraft. (Kraft spun off much of its international business in 2012 to form Mondelez.)
"I think the Hershey Trust is the biggest risk to this deal," Brittany Weissman, an analyst who covers Mondelez at Edward Jones told CNBC earlier Thursday. "There is some risk something like that could happen again."
That said, Weissman sees a potential combination as a great strategic move because the two have very complementary businesses. In confectionary, Mondelez's strength is in its international business, while Hershey is stronger in the United States. The deal would also unite the Cadbury brand, as Hershey owns its license in the U.S., while Mondelez controls it in other regions of the world.
— CNBC's David Faber contributed to this report.