A takeover of the London Stock Exchange by either Deutsche Börse or Euronext would "substantially lessen competition", according to the UK competition watchdog.
The Competition Commission (CC) identifies ownership and control over the future provision of clearing services as a key stumbling block to either merger.
Deutsche Börse owns clearing services provider Eurex Clearing, while Euronext is the biggest shareholder in LCH Clearnet, the current clearing services provider for the LSE.
The watchdog states: "Any exchange attempting to compete with LSE and win the business of trading firms on the LSE would require access to LSE’s clearing services provider."
The Commission says it will engage with all parties in an effort to agree remedies to address the anti-competitive effect of a future merger. Included in these is a discontinuation of clearing activities in the UK market, which would be a potential stumbling block for Euronext.
Euronext said it would "work closely with the Competition Commission and other relevant market constituencies to address the issues raised".
LSE's share price rose 2.96% to 530.25 pence in early afternoon London trading, as analysts decided the watchdog's bark was possibly worse than its bite and that a satisfactory merger agreement was within reach.