On Friday the Spanish government had approved the merger between its two utilities, but with conditions.

Merger conditions

48% of power distribution market 42% of generating capacity Aid for competitive market cut Divestment of Repsol stake

Nicolas Fernandez, an analyst at Ibersecurities brokerage in Madrid, told Reuters news agency that the decision not to merge was surprising.

"The conditions were tough but they appeared acceptable."

Most analysts had also expected the deal to go through.

On the condition...

As expected, the government had moved to limit the market share of the two electricity companies.

Economy Minister Rodrigo Rato said on Friday that the merged company would be limited to 48% of the power distribution market until 2005.

Rodrigo Rato: Imposed limits on market share

The government's restrictions, however, were less stringent than proposals by Spain's power and competition regulators, which had recommended a ceiling of 41%.

The new company would also have been restricted to Endesa's current generating capacity, which is 42% of the market.

Again this was higher than the 35% level suggested by the regulators.

Only hours after the government announced its approval, the companies made clear that they already objected to one of the conditions.

The government said it would strip a merged Endesa-Iberdrola of millions of euros in aid under the Spanish compensation plan for power companies adjusting to a competitive market.

"It could be a determining factor" in whether to proceed with the merger, an Endesa spokesman had said.

Divestments

The companies would also have had to divest stakes in the national oil company Repsol-YPF and in telecom companies.

They were given only 10 to 14 months to sell off assets, less than the period of two years favoured by Endesa and Iberdrola.

Analysts said a key factor in the collapse of the deal was likely to have been opposition from Banco Bilbao Vizcaya Argentaria, a major shareholder in both companies.

Endesa closed down 0.1% to 19.19 euros on Monday and Iberdrola lost 0.7% to 14.60 euros.