The decision by Perpetual to come off the fence after refusing in recent days to say which way it will vote poses a serious threat to the merger plans.
Institutional shareholders with up to 15 per cent of shares in Refuge, including Perpetual's 7 per cent stake, are set to vote against the deal at the shareholder meeting on 9 September. Other institutions have yet to decide what line to take.
Some shareholders are understood to have discussed the possibility of closing Refuge to new funds, arguing that they stand to get better value if new business acquisition costs are stripped out of the insurer.
Neil Woodford, income fund manager at Perpetual, said: "I have had time to consider further the terms of the merger since our meeting with Refuge and United Friendly last week. Unfortunately, I am not convinced that it offers the best deal to shareholders. There are still a lot of unanswered questions regarding 'orphan assets' belonging to shareholders.
"I am also aware of the argument that the company may be worth more dead than alive. I must say that it sounds too much like asset-stripping to me. But it is a measure of how some shareholders feel."
Mr Woodford's comments follow a two-hour discussion last week with John Cudworth, Refuge chief executive, and George Mack, United Friendly's finance director and chief executive-designate in the merged insurer.
The merger between both organisations which sell life and pensions products door-to-door, primarily to working class families, was announced in July.
The wrangle between Perpetual and Refuge centres on the exact proportion of so-called "orphan assets" which is attributable to shareholders before the merger with United Friendly takes place. The fund managers' argument is also based on arguments over the value of Refuge's pension fund and how much of its surplus shareholders are entitled to.
Laurie Magnus, a director at Phoenix Securities, the corporate financiers that are acting for Refuge, said: "I understand it is being argued the merger has been brought about in haste.Refuge has been in discussions with United Friendly for six months. Refuge has been in talks with the Department of Trade and Industry [over orphan assets] for 18 months."