Mining minister Susan Shabangu said the proposed merger would not be in the best interests of South Africa where Anglo has the bulk of its operations and employs more than 100,000 workers.
“That is unhealthy,” she said. “That is uncompetitive and in terms of the global standards and principles it is just unacceptable. Monopolies cannot be promoted in South Africa.”
The South African government fears the deal might result in large-scale job losses.
South Africa is one of the key countries Xstrata has to win over if its deal is to have any chance of success, with its regulators among those who can block any deal.
Anglo’s shares tumbled 46p to 1652p.
The South African government’s intervention came after the Anglo board rejected out of hand Xstrata’s proposals for the nil-premium “merger of equals”.
It is believed Xstrata will now approach Anglo’s leading investors to ask them to apply pressure on their board.
However, it is believed many will not countenance a deal unless Xstrata agrees to pay a substantial premium, even though Xstrata is positioning the deal as a 50/50 partnership with the two companies’ managements sharing the top roles.
Xstrata shares rose 4¾p to 640p. The firm is unlikely to go hostile and some City watchers believe it cannot afford to offer Anglo’s investors a takeover premium.
Takeover speculation is now looming over the two companies, with both seen as being in play in a sector likely to undergo further consolidation.
Analysts and market traders said Brazilian giant Vale could become involved with its likeliest target being Xstrata.
The two companies held talks at the height of the commodities price boom and it is felt Vale might be more enthusiastic now prices have fallen.
The other likely candidate is Chinese state-owned aluminium group Chinalco, which is keen to become involved in the sector.
It has already failed with one deal for Rio Tinto and some believe Anglo could be an attractive alternative.
However, Chinalco will have to find the funds in order to do the deal with the £13billion it was prepared to pay for helping Rio being earmarked solely for that deal.