Sainsbury's share price collapsed in morning trading on Wednesday after the Competition and Markets Authority (CMA) warned the proposed merger with Asda would create "extensive" competition concerns.
In a release on Wednesday morning, the CMA said these competition concerns could be felt at both a national and local level throughout the whole of the UK.
Furthermore, the proposed merger could result in "higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK".
It added these concerns would be difficult for the two companies to address; the final report is set to be issued by 30 April.
On the news, Sainsbury's share price dropped 14% to 247.5p, while Morrison's was down 4.6% to 229p on concerns further mergers will be thwarted.
Jordan Hiscott, chief trader at ayondo markets, commented: "The tie-up with Asda had the potential to finally allow the company to compete with Tesco and against the smaller German rivals Lidl and Aldi.
"The future of the merger now looks almost completely doomed and I suspect Sainsbury will have to reassess its next move to compete in the supermarket sector."
Overall, the FTSE 100 is trading flat at 7,184 points, buoyed in part by Lloyds, which announced it would return up to £4bn to shareholders as it reported a 24% increase in net profits in its full-year results.
Shares in the bank rose 2.7% to 59.9p with CEO Antonio Horta-Osorio adding the UK economy had been "resilient" over the past year.
Further afield, European stockmarkets have opened positively, with the EuroStoxx 50 up 0.1% while Germany's DAX has risen 0.5%.
In overnight trading, Asian markets were largely positive with the Nikkei 225 up 0.6% and the Hang Seng rising 1%.