The Competition and Markets Authority (CMA) has ruled that 21st Century Fox's proposed takeover of Sky raises plurality concerns and is therefore not in the public interest.
The CMA’s provisional findings come a year after Fox, which already owns 39% of Sky, agreed a deal to take over the remainder of the company.
The proposed takeover of Sky values the entire business at £18.5bn.
The CMA has been investigating the Fox/Sky deal in relation to media plurality and commitment to broadcasting standards. It has cleared the takeover on broadcasting standards grounds.
However, in a statement the CMA said: "The media plurality concerns identified mean that, overall, the CMA provisionally concludes that the proposed transaction is not in the public interest."
The watchdog suggested three possible ways of dealing with these concerns. Stopping the deal altogether; finding "structural remedies" such as spinning off Sky News; or by insulating Sky News from the influence of the Murdoch Family Trust.
The CMA has now invited responses to its provisional findings before publishing a final report on 1 May. The report will then go to the Culture Secretary, Matt Hancock, who will make the final decision.
The CMAs report does not factor in the deal agreed last month by Fox to sell assets including Sky to Disney for $52.4bn. This deal will face regulatory scrutiny itself.
The CMA concedes that concerns regarding media plurality would "fall away" if the Disney transaction went ahead as proposed.
The stock market was not overly concerned with the CMA’s ruling on plurality, in early morning trading Sky shares were up over 2% to 1027.3.