Qantas wanted to build on its dominant position in Australia

The deal, which would have given Qantas a 2.5% stake in exchange for NZ$550m (�175m; $276.5m) and created a regional powerhouse.

But the rulings from the watchdogs were uncompromising in their certainty that the arrangement would cut competition on routes across Asia - and damage New Zealand's economy by controlling the domestic New Zealand market.

"The fact is that there is a very large gap between the harm caused by the sharply reduced competition and the possible benefit," said Allan Fels, chairman of the Australian Competition and Consumer Commission.

"And that makes it very hard to envisage what further undertakings could be offered to meet our concerns."

Qantas shares rose slightly following the announcement, following a 4% slide on Wednesday. But shares in Air New Zealand, majority-owned by the government after a NZ$885m bailout, dived 6.5%.

Shock

The forthrightness of the rulings took both the companies and analysts by surprise.

Qantas Chief Executive Geoff Dixon was determined to press on despite the setback.

"What I can say today is that it is remarkable that both authorities appear to have completely ignored the ongoing crisis in the global aviation industry," he said in a statement.

But analysts warned the tough stance did not bode well for continued negotiations.