Timeline - Lloyds' bid for Abbey National

December 3: Abbey reveals approach from Lloyds December 12: Abbey directors reject Lloyds' bid January 31: Lloyds publishes offer details February 23: Bid referred to Competition Commission March 30: Public hearing into merger June 12: Commission passes findings to Patricia Hewitt July10: Ms Hewitt blocks deal

The commission believed that the merger would reduce competition in the current account market, in which the combined Lloyds/Abbey group would have a 27% share.

It would also hit efforts to boost competition among providers of small business banking services, "with the adverse affects in both markets of higher prices to customers and reduced innovation", Ms Hewitt said.

Although the commission accepted that the merger would lead to efficiency savings, which Lloyds estimated at �1bn a year, it "did not consider that these would be passed on to consumers in reduced prices".

Commission officials said they had considered ideas such the disposal of Lloyds' Cheltenham & Gloucester division, or Abbey's Cahoot, to ease fears of market dominance.

But they concluded that such steps "raised practical problems".

"Prohibiting the merger was the only remedy capable of fully addressing the adverse effects," the DTI said.

Key reports

The commission rated Abbey as one of the few banks able to compete against the UK's big four High Street banks - Barclays, Lloyds, Royal Bank of Scotland/NatWest and HSBC - whose grip on some financial services markets has raised widespread concerns.

Don Cruickshank: influential report

A report by Don Cruickshank, chairman of the London Stock Exchange, in March warned that major UK banks have a monopoly in the small business market, restricting price competition for customers.

And on Monday, DeAnne Julius, a former member of the Bank of England's monetary policy committee, issued a report recommending measures to encourage competition and choice for bank customers.

Fifth force?

Ms Hewitt's decision opens the way for Abbey to become the fifth force in UK banking, analysts said, although it may be overtaken by a merged Bank of Scotland/Halifax group, should the banks' ongoing tie-up efforts succeed.

"[Abbey] has been growing in the market for small businesses, exploring international markets - this decision could allow time for Abbey to fulfil this potential," Mr Centis told BBC News Online.

Nonetheless, Abbey may yet lose its independence, with National Australia Bank (NAB), Australia's biggest bank, said to be interested in entering a bid.

NAB, which already owns Yorkshire and Clydesdale banks in the UK, sold National Michigan Bank for a profit of 1.6bn Australian dollars in March.

"Merger with the NAB could have significant advantages for Abbey, helping it further its aims to develop from the mortgage-based business of old into an international concern," Mr Centis said.

NAB, Australia's largest bank, has declined to comment on the rumours.

Lloyds' options

Lloyds reaffirmed after the ruling its opinion that a merger with Abbey would not have "adversely impacted" competition in UK banking.

Peter Ellwood: Lloyds "looking overseas"

"The financial services market in the UK is a highly competitive market," the bank said.

And chief executive Peter Ellwood confirmed the views of City analysts, who believe the bank will now look abroad for a takeover target.

"What we have been doing and continue to do is to look overseas," Mr Ellwood said.

"We have been looking in Europe and also in North America and I think the climate is beginning to be more favourable,"

An analyst told BBC News Online: "The bank has a few options in the UK - perhaps Alliance & Leicester or Northern Rock.

"But the UK bank merger wave is effectively over for the time being."

Market reaction

In the City, news of Ms Hewitt's decision prompted a revival in the price of bank shares, which have been hit in recent days following profits warnings by foreign rivals, although prices fell back in later trade.

Shares in Abbey National closed down 7p at 1,173p on Tuesday, while Lloyds TSB ended up 1p at 670p.

Abbey shares hit 1213p shortly after Ms Hewitt's announcement, with Lloyds stock reaching 696p.

Shares in Northern Rock, which some analysts view as a potential takeover target for Lloyds, were the sector's top performers, rising 5.5% to 607p, their highest closing price since April 1999.