To the surprise of sports fans, politicians and shareholders alike, Stephen Byers, the Trade and Industry Secretary, halted the pounds 623m takeover bid after the Monopolies and Mergers Commission (MMC) ruled it anti-competitive, saying it would have an adverse effect on the wider football industry.
"Under almost all scenarios considered by the MMC, the merger would increase the market power which BSkyB already has as a provider of sports premium channels," Mr Byers said.
The MMC's 254-page report, compiled after an investigation lasting four and a half months, also appears to rule out the possibility of any broadcaster being allowed to own a football club in the future.
The decision sparked celebrations among the supporters' groups who have opposed the deal since it was announced last September. "The most remarkable thing is that a politician has at last stood up to Rupert Murdoch," said Michael Crick, a broadcaster, and founder of the Shareholders United Against Murdoch group.
Both BSkyB and United expressed their disappointment at the decision, but insisted that it was not a catastrophe. "We're obviously very disappointed," said David Gill, Manchester United's finance director. "But we are confident in terms of our ability to retain our success."
A BSkyB spokesman said: "We cannot see what possible competition grounds could exist, because we were prepared to withdraw from the TV negotiations."
In the City, shares in Manchester United and other listed football clubs such as Aston Villa and Newcastle crashed as investors absorbed the report's implications.
Sources in the Murdoch camp said last night its reaction was one of "disbelief rather than anger." Their surprise was echoed by legal experts who had concluded there were few concrete reasons for blocking the deal. "It's quite a surprise that they blocked in on competition grounds," said Tom Usher, a City lawyer.
Mr Blair's allies admitted Mr Murdoch would be angry and will seek to reassure him in an attempt to prevent the decision inflicting long-term damage to the Prime Minister's close relationship with him.
Ministers hope that any cooling of relations between the Murdoch and Blair camps will prove temporary. Some Labour MPs believe Mr Murdoch will retaliate by stepping up his attacks on the Government for favouring membership of the single European currency.
Labour MPs hostile to Mr Murdoch were jubilant. "It is a good day," said Chris Mullin, chairman of the Commons Home Affairs Select Committee. "It is clear evidence that the Government is not necessarily intimidated by Mr Murdoch, despite the size of his empire."
John Redwood, the Tories' industry spokesman, said the decision was "half-baked" because it left everyone unsure how sport and the media could develop together: "We need to know how clubs can profit from their valuable media rights."
The Liberal Democrats welcomed the decision. "This is good news for football fans," said David Chidgey, the party's trade and industry spokesman.Reuse content