The CNE approved E.ON's 29.1 billion euro (36.6 billion dollar) cash bid for Endesa, but promptly laid down conditions that could lead to legal challenges from the German utility.

0ne of the main conditions in the major test case for the European cross-border energy sector was that E.ON must sell a nuclear power station owned by Endesa called Asco 1.

The CNE cited "major risks for public safety represented by nuclear activities" and added that E.ON would have to give up management activities performed by Endesa in other nuclear power plants as well.

In addition, the conditions require E.ON to dispose of power stations using coal produced in Spain and to commit to Endesa's investment plan in Spain from 2002-2011 regarding infrastructure and gas transportation.

Endesa is the largest Spanish producer of electricity.

The ruling also requires the German group to sell assets owned by Endesa in the Balearic Islands, the Canary Islands and the Spanish enclaves of Ceuta and Melilla in North Africa.

E.ON had to "guarantee supplies of natural gas to the Spanish market, at least to the level of the annual quantity of gas forseen in the supply plans for natural gas presented by Endesa to the CNE," the ruling continued.

Faced with having to dispose of up to a third of Endesa's production capacity in Spain along with around 40 percent of its assets in the country, E.ON at least was not forced to sell its German subsidiary Ruhrgas within eight months, which analysts said would have amounted to a veto of the bid.

That had been a recommendation by CNE rapporteur Jorge Fabra.

The Germans were nonetheless displeased by the decision.

In a statement E.ON said: "E.ON will, following the decision, look at the conditions one by one but sees no justification for those known to date."

The group added that it planned to set in motion "legal steps" to overcome the obstacles the CNE had placed in its path.

The Spanish government referred the case to the CNE after first making it clear that Madrid prefered a rival bid launched in September by Spain's own Gas Natural, which offered 22.5 billion euros in cash and shares for Endesa.

E.ON then stepped in with its larger all-cash bid.

The case has left Madrid at loggerheads for months with the European Commission, which wants to discipline the Socialist government for passing a law aimed at helping to protect Endesa from a foreign takeover.

Spain adopted a law in February bolstering the power of the CNE to review mergers affecting national strategic interests.

The law was passed just days after E.ON announced its bid.

The EU commission launched infringement proceedings against Spain on May 3 on the grounds that the mergers review law violated the EU's single market rules.

Regardless of E.ON's next move the operation now has to clear various legal hoops.

Spanish judges had suspended the Gas Natural bid at Endesa's request, but if E.ON does pursue its offer, analysts say Endesa might now drop that appeal and accept bids from both suitors.

The EU competition watchdog ruled in November that the two companies did most of their business in Spain and that the decision should be thus left to Spanish antitrust regulators.

On Friday, shares in Endesa gained 2.40 percent to 26.85 euros, while Gas Natural stock rose by 3.81 percent to 25.62 euros on the Madrid stock exchange.

The Ibex-35 index of leading shares gained 1.01 percent overall.

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