The watchdog's report could spark further bids for the LSE

The Competition Commission said the two must ensure the independence of the LSE's clearing services, LCH.Clearnet.

Pan-European bourse Euronext could now move towards formalising a bid and agreeing a price with the LSE.

Meanwhile, Germany's Deutsche Boerse may revive its bid. It dropped plans for a �1.3bn ($2.5bn) offer in March.

However, Deutsche Boerse refused to comment on whether it would resurrect its bid following the release of the watchdog's report on Tuesday.

Either merger would make it more difficult for other exchanges to compete with LSE in trading UK equities Competition Commission

Meanwhile, the LSE said it was happy with the report, and would continue to "pursue opportunities to enhance shareholder value".

Competition fears

The Commission made its ruling following a seven-month investigation into takeover offers for the London exchange.

Its findings repeated concerns it voiced in a preliminary report in July, which stated a takeover by either firm would "substantially lessen competition".

"Either merger would make it more difficult for other exchanges to compete with LSE in trading UK equities due to both bidders direct control or influence over the provision of clearing services," it added.

In order to reduce such worries the Commission set out a number of hurdles prospective bidders must clear.

Euronext was told it would have to substantially slash its stake in Clearnet - from 41.4% to below 15% - and limit its representation on Clearnet's board to just one seat.

Meanwhile, Deutsche Boerse would face similar constraints if it decided to make its own clearing provider, Eurex Clearing, the main provider for the LSE.

Both bidders were also warned not to obstruct access to the LSE's clearance provider by any competitor.

Clearance services ensure trades made between buyers and sellers of shares "settle" by essentially overseeing the back office administration behind the transactions.

Other bidders?

Euronext, which operates several European exchanges including the Paris exchange, said in a statement that it would review the findings review the findings and the impact of possibly divesting its Clearnet holdings.

If the company does make a bid for the exchange, analysts expect the offer to be somewhere in the region of �1.1bn.

However, commentators have warned that Euronext should expect other bidders to come forward.

Australia's Macquarie Bank has previously voiced its interest in the London exchange, while Sweden's OMX Group is also rumoured to be considering making a second offer.

Deutsche Boerse began the latest pursuit of the LSE when it proposed a 530p-a-share offer for the exchange in December last year, valuing it at about �1.3bn.