Shares in London Stock Exchange (LSE) dropped in mid-morning trading after the UK's Office of Fair Trading (OFT) said it is referring two rival takeover proposals from Deutsche Börse and pan-European exchange Euronext to the Competition Commission (CC).
LSE shares fell five per cent to 452 pence following the OFT announcement.
In a statement, the OFT says neither proposal was at this stage able to resolve all competition concerns in a sufficiently clear-cut manner.
The OFT says the test for reference to the Competition Commission is met in relation to the supply of on-exchange trading services for equities in the UK in both cases.
John Vickers, OFT chairman, says the proposed bids for the LSE come at a time of emerging competition in equities trading between the LSE, Deutsche Börse and Euronext.
"Although such competition has so far been episodic, it needs to be investigated whether either merger would lessen future competition in equities trading in the UK," he adds.
Vickers says the Competition Commission will also want to consider the effects of the mergers on competition in clearing services for equities trades in the UK, particularly with the Deutsche Börse bid.
The LSE has issued a statement saying it still believes that stock exchange consolidation, on the right terms, could be in the best interests of customers and shareholders. The UK exchange says it remains willing to continue discussions with potential offerors.
The Competition Commission is expected to publish its findings by 12 September 2005.
Deutsche Börse initially approached the LSE with a $1.35bn takeover bid in December, but the offer was rejected twice by the UK market operator. The German exchange dropped its proposed offer earlier this month after failing to gain a recommendation from the LSE and after facing increasing opposition to its takeover plan from its own shareholders.
But the Börse said it may still bid for the LSE if Euronext or another third party exchange made a formal offer and it asked UK and German regulators to continue to examine its bid.
Meanwhile rival suitor Euronext, which runs the Paris, Brussels, Amsterdam and Lisbon stock exchanges, has been in talks with the LSE about a potential bid but has not yet disclosed what it would be prepared to pay for the UK market operator. In a statement Euronext says it will work closely with the Competition Commission. The exchange says it is convinced that it is the natural partner for the LSE.