'After much soul-searching, Kelly decided that Billy is not the man she wants to marry and has called off the engagement,' says a source.
'The split is completely amicable and the decision was made after long conversations here and in the US. They remain good friends.'
Kelly, 28, who appeared without her engagement ring at the Bafta Television Awards on Sunday, re-evaluated the relationship after her dad Ken died in November.
'When her dad passed away she spent a lot of time mulling over life and decided she was too young to settle down,' says the insider.
'Billy was keen, but she kept delaying plans for the big day. He started asking questions and they eventually decided to go their separate ways.'
Billy, 42, is planning to relocate to LA after moving out of their £1m farmhouse in Kent.
The pair met on the set of thriller Three in 2004.
Where to next?
- Divorce - what happens next?
- Relationship problems - we always argue about the same things
- Relationship problems - we don't talk any more