Two of France's leading energy companies, Suez and Gaz de France, are set to merge in a deal creating a 72 billion euro (£48.9bn) business.
The deal has been strongly criticised by Italian ministers who view the tie-up as an attempt to thwart a deal between Suez and Italian firm Enel.
Italian production minister Claudio Scajola said it was bad for consumers and smacked of "neo-protectionism".
The French government owns a majority stake in Gaz de France.
Economic patriotism
The deal was revealed by French Prime Minister Dominique de Villepin who said it would create one of the world's leading energy companies.
However, critics said the proposal was an attempt to keep Suez in French hands.
The announcement came days after Italian energy giant Enel said it was interested in buying Suez's Belgian subsidiary Electrabel and might bid for Suez itself.
"We have the ambition to create one of the top energy groups in the world, in particular in the gas sector"
Mr Scajola cancelled a meeting with French counterpart Francois Loos scheduled for Monday after news of the planned deal emerged.
Paris has championed a policy of "economic patriotism", whereby French companies and investors are expected to act in the country's national interests when taking major business decisions.
The French government has denied that this policy restricts free market competition and is against the spirit of European integration.
If the deal goes ahead, the French government would own 34% of the combined business.
Culture factor
Gaz de France is France's leading gas distributor while Suez supplies gas, electricity and water across Europe.
"With this merger, we have the ambition to create one of the top energy groups in the world, in particular in the gas sector," Mr de Villepin said.
In a statement, Suez's board of directors said it supported the proposed deal which it said would create jobs and respect both firms' cultures.
However, Italian ministers warned that growing economic "neo-protectionism" threatened the cohesion of the European Union.
"No-one wants the blocking of the European market, but then someone launches an ultimatum and the other one responds and the effect is a waterfall," economy minister Giulio Tremonti told La Stampa newspaper.
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