The European Commission has prevented the French government from subsidising the beleaguered engineering group Alstom.
Alstom is a major player in the transport market
The European Union's executive arm said it was blocking "in principle" the rescue plan worth 2.8bn euro ($3.1bn) and launching an investigation into the bail-out.
Alstom, battered by cost overruns on key projects, accounting irregularities at its US operation, and the bankruptcy of a major client, has lost 90% of its market value and shed thousands of jobs over the past two years.
Alternative ways for France to help the company have been suggested, the EU Competition Commissioner Mario Monti said.
The Alstom case has become a test of Paris's strength against that of Brussels.
A French government spokesman in Paris said France hoped to find a solution which would comply with EU competition rules but save jobs.
The French authorities have until Monday to "publicly commit
themselves not to participate in measures that would mean the
irreversible involvement of the French state in Alstom", EU officials said.
But they added that they are still open to continued dialogue with the French government.
Alstom - employing 118,000 people in more than 70 countries - builds power turbines, ships (including the Queen Mary II) and France's high-speed TGV trains.
The company employs around 10,000 people in the UK.
Shares in Alstom plunged on the French stock exchange and were suspended from trading after the European Commission's announcement.