Ministers are fighting to salvage a £12 billion deal to secure Britain’s future as a nuclear power producer after rebel shareholders blocked the sale of British Energy to the French company EDF at the eleventh hour.

John Hutton, the Business Secretary, was furious that British Energy’s board refused to recommend a bid from EDF after two key shareholders rejected the deal, arguing that it undervalued their shares.

Mr Hutton had all but signed off on the sale of the Government’s 35 per cent stake to the French company, hoping that it would kick-start the massive investment needed to replace Britain’s ageing nuclear reactors.

British Energy operates eight nuclear power stations and produces a sixth of Britain’s electricty. EDF had proposed building at least four nuclear power stations using the latest French technology.

In an embarrassing U-turn, EDF withdrew late on Thursday after British Energy’s board said that it could not recommend the deal because two investors with a 22 per cent stake between them – Invesco and Prudential – wanted more money for their shares. Sources said that it was by no means clear that EDF, which had already raised its bid from 700p a share to 765p, would increase it again.

It means that the Treasury will now have to go without roughly £4 billion that the sale of the Government’s stake would have yielded. That will put further pressure on Alistair Darling, the Chancellor, to impose a windfall tax on the big energy companies as a way of generating revenue to help families struggling to meet the rising cost of fuel.

“It’s an absolute disaster,” one banker close to the deal said yesterday. “To end up this way after months of negotiations is just unbelievable.”

In a statement Mr Hutton said: “I am disappointed that talks between British Energy and EDF have not yet been successful. We thought it was a good deal and we were ready to accept. EDF is the world’s largest nuclear operator. It would have been a sensible way to take forward new nuclear plans in the UK. That wasn’t the view of all of the shareholders. It is now a matter for both boards to see how to proceed.”

EDF’s chief executive declared yesterday that his company still intended to become the leading player in Britain’s new generation of nuclear power plants. “Our ambition and determination remains intact,” Pierre Gadonneix said.

It was unclear yesterday whether a deal could be salvaged from the wreckage but if it cannot the options are limited. No other credible bidder exists for British Energy, which needs a stable and well-financed partner to build the next generation of power plants. Privately, only a few weeks ago, government sources told The Times that they saw no serious alternative to a takeover. There are other options. British Energy could strike a series of deals with other groups to develop its individual sites, such as Dungeness, Sizewell and Hinkley Point. There would be no lack of interest.

Other companies, including RWE and E.ON of Germany, Iberdrola of Spain and the British company Centrica, the owner of British Gas, have all expressed interest in the new nuclear programme but shied away from the expense of buying British Energy. Such an arrangement would require a complex round of horse trading to secure the best sites and there would also, inevitably, be room for disputes over technology and how to structure the deals.

All of this would be a far less elegant solution than an outright takeover by EDF and would probably delay the construction of new plants. Sources said yesterday that they were holding out for a breakthrough in talks between British Energy and its shareholders. EDF’s positive noises suggest that there is still a chance of a deal.

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