The European Commission has begun an "in-depth" investigation into Ryanair's €1.4 billion bid for Aer Lingus, citing "serious competition concerns" if it went ahead.
Whatever the outcome of teh European Commission's ruling today, Ryanair has said it intends to stay on the Aer Lingus share register.
The EC said any deal combining Ireland's two largest airlines could reduce customer choice for consumers and possibly result in higher fares.
The Commission now has 90 working days - until May 11th - to reach a decision on whether to approve the merger or to declare it in breach of EU rules on fair competition.
Ryanair said in a statement it was "disappointed" by the Commission's decision, but insisted it would make a new offer for Aer Lingus if the EC clears the way for it to do so.
"Ryanair regrets this unnecessary delay and any uncertainty it may cause for Aer Lingus shareholders and consumers who want access to lower fares and better service," it said in a statement.
Chief Executive Michael O'Leary said Ryanair did not accept the Commission's argument that it did not have sufficient time to consider Ryanair's proposed remedies to competition issues.
"Ryanair is aware that in previous airline consolidations the final remedies were still being tested and negotiated between the airlines and the European Commission the night before the decision was due. This was particularly so in the case of the Air France-KLM merger."
Mr O'Leary also said the decision to refer the takeover to a Phase II investigation flew in the face of the EC's stated policy of encouraging consolidation amongst European airlines. However, he said Ryanair was confident its offer would win EU competition approval under the Phase II procedure.
Minister for Transport Martin Cullen said the EC's decision was "consistent" with his view that the takeover would reduce competition.
"Ireland's strategic interest in aviation is best served by the provision of regular, safe, cost-effective and competitive air services linking the country to key business and tourism markets," he said. "We want to see a strong Aer Lingus and a strong Ryanair competing vigorously and developing new routes."
Aer Lingus also welcomed the decision and said in a statement it "will be co-operating with the European Commissions as it proceeds with the in-depth investigation".
Aer Lingus recently introduced what the EC tonight called "features of a low-cost, low-fares airline model, while retaining some elements of the traditional airline model." Aer Lingus services connect Dublin, Shannon and Cork with some European and several non-European destinations.
The proposed takeover, bringing together the two main airlines operating out of Ireland, would lead to "important overlaps on a large number of European routes" said the Commission. On many routes of those routes, the two Irish carriers are the only two competitors.
"The Commission's initial investigation has found that the two carriers are each other's closest competitors for services out of Ireland and that barriers to entry are high," it said. "The proposed merger could lead to the elimination of actual and potential competition between the two carriers on a large number of routes out of Ireland as well as eliminate current base competition at Dublin airport."
The Commission said that competitors and customers had said the initial package of remedies offered by Ryanair did not meet their concerns. It said although Ryanair submitted an improved proposal at a late stage, there was not enough time to determine if it solved problems raised by the deal.
Even before today's ruling, Ryanair's bid already looked troubled. Mr O'Leary told an extraordinary meeting of Ryanair shareholders last week the takeover offer the bid was "highly unlikely" to succeed.
The budget airline has spent €342 million becoming Aer Lingus's second-biggest shareholder with a 25.2 per cent stake
Aer Lingus shareholders, including the airline's employees and the Irish government, have until Friday to accept Ryanair's €2.80-per-share offer. Less than one per cent of Aer Lingus shareholders have so far accepted. Shareholders representing about 40 per cent of Aer Lingus's total stock have already expressed opposition.
The Government, which owns 28 per cent of Aer Lingus, is also strongly opposed to the takeover and says it will not sell under any circumstances. Aer Lingus's Employee Share Ownership Trust (ESOT) has nearly 13 per cent of the stock, pilots another 2.3 per cent and businessman Denis O'Brien 2.1 per cent.