The European Commission says it is taking legal action against Spain for interfering in German energy giant E.On's bid for Spanish utility Endesa.
The Commission said it was referring Spain to the European Court of Justice for imposing "unlawful" conditions on the 42.3bn-euro (£28.6bn) bid.
E.On has stalked Endesa for six months and raised its offer on Monday.
If successful in its bid, it would create one of the largest energy firms in Europe.
However, Spanish construction firm Acciona and Italian utility Enel have built up significant holdings in Endesa over the last six months, and now control 46% of the business between them.
The long-running battle for control of Endesa has fuelled accusations of favouritism by the Spanish authorities, with critics saying Madrid has tried to keep the firm out of foreign hands.
E.On claims Acciona and Enel have misled investors over their plans.
Concerns 'not met'
EU regulators had complained about conditions the Spanish government imposed on E.On's bid to buy Spanish electricity firm Endesa, saying they violated European competition rules. Earlier this month, the European Commission said it had received a reply from Spain.
However, it now appears Brussels has decided that Madrid's reply does not satisfy its concerns.
The Spanish government insists that E.On must keep the Endesa brand for at least five years and use only Spanish coal in power stations. It also stipulates that certain assets cannot be sold off.
"Since the Spanish government has still not withdrawn the illegal measures... the Commission has decided to refer the case" to the EU court, a Commission statement said.
Rivals on hold
On Tuesday, Spain's market regulator ruled that Acciona and Enel must take a back seat until after investors have voted on E.On's bid for Endesa.
However, it reiterated that any offer could not be made until six months after the 3 April deadline set for Endesa investors to support or reject E.On's offer.
E.On's bid gained further momentum late on Monday when Spanish bank Caja Madrid, which owns a 9.9% stake in Endesa, said it would lend its support under certain conditions.
It will cede control of its stake to E.On for two years as long as it retains its voting rights and has more say over the running of the firm.
The agreement is conditional on E.On's bid being accepted by the rest of shareholders.
According to E.On, Acciona and Enel have behaved improperly by saying that they would make a joint 43.4bn-euro bid for Endesa at a time when the company's shareholders were preparing to vote on E.On's offer.
E.On has urged Spanish regulators to open infringement proceedings against its two rivals and to bar them from making a future bid.
(BBC News, 28/03/2007)