John Taylor, the corporate and consumer affairs minister, took the decision after being advised by the Director General of Fair Trading, John Bridgeman, that a takeover would give rise to competition concerns in Scotland. The Government's announcement is unusual in that it is the first time a company has been blocked from taking over a passenger rail service before the franchise has been awarded.
The decision is a setback for Stagecoach, which is expanding aggressively from buses into trains as part of a strategy to increase turnover to pounds 2bn by the end of the decade.
As well as being Britain's second-biggest bus operator, the group already owns two rail franchises - SouthWest Trains and Island Line on the Isle of Wight - and the Porterbrook train leasing business.
Stagecoach is also one of the biggest bus operators in Scotland, running services in Glasgow, Aberdeen, Inverness, Fife and Perth. If selected for the ScotRail franchise, it would be the most powerful player in the Scottish transport market. ScotRail has annual revenues of pounds 86m, just under 4,000 staff and operates 1,500 route miles between 327 stations.
A spokesman for Brian Souter, the chairman and co-founder of Stagecoach, said last night: "We are seeking an early meeting with the Office of Fair Trading. We would not have started on the process of bidding for ScotRail if we had thought the problems were insurmountable."
Stagecoach is in competition for ScotRail with the coach operator National Express, Prism, which is owned and run by a group of bus industry executives, a consortium involving Go Ahead, another bus group, and the ScotRail management.
A spokesman for the director of passenger rail franchising, John O'Brien, said he expected to announce the preferred bidder for ScotRail in the next fortnight and award the franchise in the next four to six weeks. If Stagecoach is successful and its bid is referred to the MMC for an inquiry lasting at least three months then it could fall to a Labour government to decide whether to allow the deal to go through.
Mr Taylor said his decision did not prejudge the franchising director's decision, nor did it prejudge whether a merger of Stagecoach and ScotRail would be against the public interest. "It would be for the MMC to report on this after investigation," he said.
A spokesman for the DTI declined to spell out precisely what its objections were other than to say that it was concerned about "numerous and complex potential rail and bus overlaps in the franchise area".
Last month National Express agreed to a series of undertakings to avoid an MMC referral of its takeover of another rail franchise, Midland Mainline. The Government was concerned about its domination of the market on coach and rail services between London and five cities in the Midlands and the North. However, the DTI spokesman said that in the case of Stagecoach and ScotRail there were no undertakings that would be sufficient to prevent a referral.
It is not clear whether Labour would block the sale of ScotRail if it were in power when the MMC reported. Under the Railways Act, the Secretary of State for Transport is under a duty to privatise the railways. Were Labour to decide not to award the ScotRail franchise then it would probably have to amend primary legislation.
Stagecoach insiders said they found it odd the Government had decided to make a referral because local bus operations and long-distance rail services were separate and distinct markets.
In the case of its takeover of SouthWest Trains, one of the factors in its favour had been the way Stagecoach's bus branch lines knitted together with commuter rail services.
Stagecoach is also bidding for the five other passenger franchises still to be awarded - Central Trains, North West Regional Railways, Regional Railways North East, Thameslink and InterCity West Coast.
Comment, page 17
Mr Souter's great railway journey
Dec 1995 - First move into the rail industry as Stagecoach is awarded seven-year franchise to run SouthWest Trains - Europe's biggest commuter railway with 200 stations and 4,000 staff.
July 1996 - Stagecoach buys the train-leasing company Porterbrook for pounds 825m and announces that it will bid for all remaining British Rail franchises.
Oct 1996 - Starts operating rail services on the Isle of Wight after being awarded a five-year franchise to operate the Island Line.
Jan 1997 - Stagecoach seeks urgent talks with the Office of Fair Trading after being told it will be referred to the MMC if it is awarded the franchise to run ScotRail.