A European court has overturned the European Commission's decision to approve the merger of Sony and Bertelsmann's music businesses.
Sony BMG has a roster of top artists such as Bruce Springsteen
The Court of First Instance upheld a complaint from a group of independent record labels, saying the union of Sony Music and BMG required more scrutiny.
The Court said regulators had not adequately shown that the 2004 deal would not hurt competition.
The merger created the world's second-biggest record label.
It also left the world's four largest music firms with 80% of the market.
Sony BMG now has a week in which to renotify regulators of its merger proposals.
"Today's judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004," the company said in a statement.
"We are studying the judgment carefully and shall discuss the appropriate next steps with the European Commission."
The Sony BMG joint venture brought best-selling artists such as Elvis Presley, Bruce Springsteen, Rod Stewart and Christine Aguilera under one roof.
Brussels approved the tie-up in 2004 without attaching any conditions to the merger.
Initial concerns that the deal would push up CD prices and reduce consumer choice were unfounded, the Commission said at the time.
However, the Court of First Instance has decided that regulators must re-examine the deal.
In a statement, the Court said the Commission had failed to sufficiently demonstrate that the deal would not result in the world's top companies having a "collective dominant position" in the market.
It criticised regulators for conducting an "extremely cursory examination" of the risks posed to competition by the deal.
The Commission said it would review the case, a process which could potentially take up to four months.
The 2004 deal, which excluded Sony's Japanese music business, left the bulk of the global music market in the hands of four businesses - Sony BMG, Universal Music, Warner Music and EMI.
Impala, which represents more than 2,000 European music companies, argued that the deal would make it harder for independents to sell their products and threaten cultural diversity.
"There is no doubt that it will block any further mergers and will transform how music and other creative sectors are treated," said Patrick Zelnick, Impala's president.
The ruling has also cast doubt on whether a possible tie-up between EMI and Warner Music would be allowed to proceed.
The two companies have each offered to buy the other but have seen their bids rejected.
EMI's shares closed down 9.2% on Thursday amid fears that any deal would be blocked.
EMI said the ruling would have been studied carefully before "any wider conclusions" were reached.