The deal would have left C&W, the UK's second largest telecoms company, in control of Optus and AAPT - Australia's second and third largest telecoms companies.
C&W last month raised pounds 3.8bn short-term finance on the back of its stake in the mobile operator One2One to fund its global acquisition programme.
Optus had wanted to acquire AAPT to gain access to its data networks business and sustain its own earnings growth as competition in Australia's A$25bn telecoms market intensifies.
But its A$5-per-share bid, made in April, was already seen as being too low to attract investors, after Telecom New Zealand bought 9.9 per cent of AAPT last month at A$5.70 per share - a 14 per cent premium to Optus's offer.
"Investors will view this unfavourably for Optus [because it] can't grow through acquisition,'' said Juan Merchan, an analyst at Burdett Buckeridge Young.
In its statement, the watchdog's chairman, Allan Fels, said the removal of AAPT as one of the country's three providers of national telecoms networks "would be likely to have substantial effects on competition''.
The collapse of the Optus offer is a boon for Telecom NZ, which is 24.95 per cent-owned by US phone company Bell Atlantic. Under Australian stock exchange rules it can wait four months and make a bid at a lower price than the A$5.70 it paid for its initial stake.Reuse content