Two major shareholders in British Energy are understood to have vetoed the £12 billion bid by French energy giant EDF which threw the Government's nuclear programme into chaos last night.

A source said the deal had foundered when at least two of British Energy's key private investors held out for a higher price. The shareholders argued that EDF's bid had been overtaken by rising fuel prices and should be increased.

A source declined to confirm a rumour that Invesco and Prudential, which collectively own 22 per cent of British Energy, were the shareholders which blocked the deal.

The French state electricity supplier is understood to remain keen to win over British Energy's board. It is expected talks will continue and that the takeover had been postponed but not abandoned.

At a press conference, Pierre Gadonneix, EDF's chairman and chief executive said: 'After extensive discussions and listening to the demands of the different parties, we believe that the financial conditions for a major development of EDF in Great Britain are not right today.

'The trend towards nuclear power is being confirmed in certain countries, notably the UK. It is a subject in which EDF plans to have a leading position.'

Mr Gaddoneix effectively ruled out a hostile bid for British Energy when he said EDF would only invest 'in a country where it was welcome'

Invesco is British Energy's leading shareholder and owns almost 15 per cent of the company while Prudential has 7.2 per cent. Deutsche Bank owns a 7.56 per cent stake.

EDF, which walked away from takeover talks in the early hours of this morning, is understood to have proposed two offers: a 765p cash bid or 700p in cash plus further payments based on performance.

The options were put to British Energy’s board late on Thursday, but were rejected. Shares in British Energy fell 5.89 per cent, or 43p, to 686.5p in early trading.

The group said this morning that conditions allowing for a “major development” in the UK were “not met”. It had been widely expected to announce a bid for British Energy this morning after months of talks.

British Energy held talks with several energy companies earlier this year, including RWE of Germany, Iberdrola of Spain and Vattenfall of Sweden, but EDF became the frontrunner to buy the group after making an offer of 680p a share in May.

This was rejected as too low, but the two sides continued talking.

Shortly before midnight last night EDF released a statement saying that conditions were not right for “a major development in Great Britain”.

EDF were keen to stress last night that while talks over a full bid for British Energy had collapsed, it could be interested in other UK nuclear deals in future.

A source close to the talks said: "EDF's interest in the industry in the UK pre-dates discussions with British Energy. We have other options but are still interested in discussion with BE."

The takeover of British Energy, which operates eight ageing nuclear power stations and produces one sixth of Britain’s electricity, was seen as critical to the Government’s plans to replace the country’s reactors. It owns 35 per cent of British Energy. EDF had proposed building four nuclear power stations using French technology.

Centrica, the owner of British Gas, had also been expected to take part in the deal by acquiring a 25 per cent stake in British Energy from EDF.

The surprise announcement by EDF — it had been reported earlier in the evening that its board had agreed the deal — leaves the Government facing the prospect of its nuclear plans being delayed by years.

A government source said last night that British Energy emerged from a board meeting to say that the deal was off. Another source close to the deal said that the company had last-minute reservations about the terms.

The Government had pinned its hopes on the sale as a way of encouraging a building programme to replace ageing reactors. Many of its nuclear and other power plants are due to be retired from service.

If the deal cannot be revived with EDF, or another bidder be persuaded to enter the frame then the Government could be forced to create a series of smaller deals to build individual stations, which is likely to be highly complicated, expensive and drawn-out. John Hutton, the Business Secretary, said in March that nuclear power could be Britain’s biggest energy asset since North Sea oil and gas.

The Department for Business, Enterprise and Regulatory Reform had said last night that it was “watching events closely”, adding that the Government’s commitment to nuclear power was unswerving.

A spokeswoman said: “Our commitment to nuclear power is clear. The go-ahead for new nuclear power, alongside our action to promote energy saving and renewables is in Britain’s long-term national interest.

“The level of interest in nuclear new build remains high and recent months have shown there are strong signals of an appetite for this from the market. Recent developments in energy markets underline the need for nuclear build to combat high fossil fuel prices, climate change and security of supply.

Peter Luff, the chairman of the Commons Business and Enterprise Select Committee, said last week that the expected takeover threatened to reduce price transparency in the electricity market and create an overly dominant player that would add to upward pressure on prices paid by consumers.

British Energy operates one coal-fired and eight ageing nuclear power stations, including Hinkley Point, Torness and Dungeness. EDF had been the only bidder to have submitted a serious offer before the May deadline. EDF said last night: “After in-depth discussions, EDF considers that the conditions for a major development in Great Britain are not met to date.” It is due to hold a press conference in Paris this morning.

Since Britain’s current nuclear reactors were built in the 1960s and 1970s, it has lost many of the high-end engineering skills needed to replace the fleet — a complex project. French expertise was thought, therefore, to be essential to train a new generation of British nuclear engineers and to help them to build and run the new plants.

When the deal was in the offing it was presented as a huge bonanza for the French nuclear industry, which is also angling to win similar contracts in other countries considering new-build nuclear programmes, including South Africa and China.

A statement released by The Department for Business, Enterprise & Regulatory Reform said: Our commitment to nuclear power is clear. The go ahead for new nuclear power, alongside our action to promote energy saving and renewables is in Britain's long term national interest.

"The level of interest in nuclear new build remains high and recent months have shown there are strong signals of an appetite for this from the market. Recent developments in energy markets underline the need for new nuclear to combat high fossil fuel prices, climate change and security of supply."

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