The EU's Court of First Instance said that EU regulators' examination of the deal for competition risks had been sloppy and had failed to show that the deal would not create a music giant that dominated the market.

In a blow to the commission's authority, the decision means that EU regulators will have to reopen the case and take a harder look at potential risks to competition.

"The commission will analyze the ruling very carefully and decide after thorough consideration which consequences to draw," said spokesman for competition issues Jonathan Todd.

Sony and BMG's parent company, Bertelsmann, will now have seven days to formally seek Brussels' permission for the merger, which EU regulators would then have to review again under current market conditions, he said.

Todd said that if in the hypothetical case that regulators were to rule against the merger, then it "would have to be reversed."

Merger created second largest music company

In reaction to the court's decision, Bertelsmann said: "Today's judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004 -- after having been notified and investigated by the European Commission."

"We are studying the judgement carefully and shall discuss the appropriate next steps with the European Commission."

The merger of the music business of Japanese electronics and entertainment group Sony with German media group Bertelsmann's BMG unit created the second-biggest company in the music market after Universal.

Headquartered in New York City and owned equally by Sony and Bertelsmann, Sony BMG has contracts with stars ranging from ACDC to ZZ Top, as well as Bruce Springsteen, Oasis and Placido Domingo.

The independent producers' association Impala protested that such a concentration of power would leave the music majors with a stranglehold on CD prices and artists' contractual terms and asked the court to review the decision.

Merger approved in 2004

The European Commission approved the merger in July 2004 even though it acknowledged that the deal would leave four major players in the market -- Universal, Sony-BMG, Warner and EMI.

The court ruled that the commission's antitrust busters had carried out an "extremely cursory examination" of the deal.

A lawyer for Impala voiced satisfaction with the court's decision, which she said showed that regulators had made "manifest errors."

"For us, the commission committed manifest errors of judgement because it did not do the necessary research to show the absence of a collective dominant position," the lawyer said.

Impala has long fought against greater concentration in the music business and recently slammed Warner and EMI for trying to take each other over.

However, the lobbying group's eagerness for a quick ruling on Sony BMG irritated the judges, who ordered it to pay a quarter of the procedure's costs as a result.

The commission and the companies have two months to lodge an appeal against the decision.