The action by the US Justice Department is just one more in a string of disasters that have bedevilled Mr Murdoch's ambitions to extend his near-global satellite television empire to the one important market he has not conquered: North America.
Joel Klein, the competition chief at the Justice Department, said in a statement that he was standing in the way of the sale on the grounds it would stifle competition between the cable and satellite industries.
It is likely, however, that Mr Murdoch's News Corp and MCI will move swiftly to appeal the decision. They may be joined in the effort by the members of the Primestar consortium.
The Direct Broadcast Service (DBS) slot is one of only three available for transmissions in the US. Primestar had planned to use it to launch a full-blown direct broadcast service in competition with the two other lone players in the field, DirecTV and EchoStar communications.
Mr Klein was advised by his officials over a month ago that the acquisition of the slot by Primestar would seriously undermine competition between cable and satellite providers in the US. The cable industry is already under attack for raising prices at four-times the rate of inflation.
Primestar is owned jointly by Denver-based Tele-Communications Inc - owned by John Malone, a personal friend of Mr Murdoch; Comcast; Time Warner; Cox Communications and MediaOne Group.
"Cable prices continue to increase rapidly and unless this acquisition is blocked, consumers will be denied the benefits of competition: lower prices, more innovation and better services and quality," Mr Klein said.
Underscoring that satellite broadcast represented the only effective competition to the cable sector, Mr Klein added: "DBS presents the first real threat to the cable monopoly."
Mr Murdoch has known nothing but frustration in trying to gain a foothold in satellite broadcasting in the US. News Corp and MCI originally set up a joint venture, American Sky Broadcasting, after MCI acquired the precious satellite slot for $628.5m in 1996.
When MCI lost interest in the venture after becoming a target of corporate takeover, Mr Murdoch changed tack and attempted to acquire Denver-based EchoStar. It was after that deal fell through 12 months ago, that he then agreed with MCI to sell the slot to Primestar.
Reacting to Mr Klein's decision, EchoStar spokeswoman, Karen Watson, said: "The Justice Department made the right decision for competition and the consumer." There was no comment from News Corp.
The action was felt meanwhile in the bond market, where Primestar had been expected yesterday to make its debut with a $400m junk bond deal. The deal was delayed, however.Reuse content