The commission is extending its inquiry to cover a fresh capital injection of Fr8.6bn, announced by Paris in December. That was to be made up of Fr7bn from the French government and a further Fr1.6bn from France Telecom, one of Bull's main shareholders.
Paris has 30 days to submit 'all the necessary information' to enable the commission to finish its inquiry. However, the commission said it believed the plan was not acceptable. Bull received Fr2.5bn in February last year, which triggered the original inquiry.
Gerard Longuet, industry minister in the French centre-right government, argued that Bull should be allowed special public funding, citing the loss-making German steelmaker Eko Stahl, which was allowed state aid to reverse 40 years of East German mismanagement.
The commission also opened a state aid inquiry into the German steel company Kloeckner Stahl. The company, set up by Kloeckner Werke - which was last year allowed to write off substantial loans to stave off bankruptcy - and four other partners in a private-public consortium, is due to be recapitalised to the tune of DM250m ( pounds 95m). Some 68 per cent of the risk capital is to come from public funds.
The commission said it was not convinced that the majority of the capital to be invested in the new company would come from private investors and questioned whether the state was acting as 'prudently' as a private sector investor.
The clampdown is certain to be welcomed in Britain, where opposition to government subsidies for lossmaking companies has been most vocal. The Confederation of British Industry today publishes a discussion paper criticising the level of state aid and warning that a resurgence of support could undermine competition policy throughout the European Union.
British Steel last night backed the commission's decision to open an inquiry into the proposed aid for Kloeckner Stahl, to be used to keep a large hot strip mill open.
'This is equivalent to a massive subsidy because the company could not otherwise run the business economically,' a spokesman said. 'The continued operation of that mill in the current environment of overcapacity would be a negation of everything the Commission has said.'
Yesterday the commission also approved the creation of a German- French-Italian joint venture in steel tubes in a controversial vote that had the competition commissioner, Karel van Miert, pitted against his colleagues.
The decision saw voting along national lines when strictly speaking commissioners are supposed to be impartial. It effectively sanctions the creation of a duopoly which the commission has tended to view as anti-competitive.
Although all the details have yet to be finalised, the new company will involve Vallourec of France, Ilva of Italy and Mannesmann of Germany. Together with the Swedish company Sandvik, it will control 70 per cent of European steel tube production.
Mr van Miert had argued against the merger on competition grounds, supported by Sir Leon Brittan, the two Spanish commissioners Manuel Marin and Abel Matutes, and the Greek Ioannis Paleokrassas.
The voting also underlines the extent to which commissioners are divided over the practice of European industrial policy. While some, such as Sir Leon Brittan, Mr van Miert's predecessor, favour a laissez faire approach, there are others, notably the commissioner for industry, Martin Bangemann, who would like to see Europe adopt the kind of centralising approach exemplified by Japan's all-powerful Ministry of Trade and Industry.
The commission will go ahead with its threat to challenge the gas or electricity distribution monopolies in six member countries including France and Ireland, an official said.