By Jonathan Gould and Andreas Kröner
FRANKFURT (Reuters) - German regulators contested plans for a merged Deutsche Boerse-London Stock Exchange to be based in London following Britain's vote to leave the European Union, while one politician even said the deal was now as good as dead.
Deutsche Boerse <DB1Gn.DE> and LSE <LSE.L> agreed in March to a $30 billion merger to create a European trading powerhouse that would be domiciled in Britain with headquarters in both London and Frankfurt.
Two German regulatory sources told Reuters on Friday, however, that there was increasing scepticism about London being the base for the holding company of the combined group.
"There is rising irritation and increasing concern that London as a base poses a problem," one of the sources said after the Brexit vote.
The exchange regulator in the German state of Hesse, where Deutsche Boerse is based and which has the power to block the deal, declined to comment.
The state minister to whom the regulator answers, however, said Brexit would play a role in the decision about whether to approve the deal.
"We will take account of yesterday's decision in our review," Tarek Al-Wazir wrote on his Facebook page. "We will wait and see whether the plans remain in their current form."
"MERGER IS DEAD"
German politicians turned more critical of the deal. Michael Fuchs, a leading politician in Chancellor Angela Merkel's CDU party, demanded the German government work to ensure the combined company's seat be outside the United Kingdom.
"Out is out," Fuchs told Reuters. "There cannot be a London base for the merged company after the Brexit."
Hesse Premier Volker Bouffier also said the domicile of the merged group should move to Frankfurt.
Thorsten Schaefer-Guembel, a senior politician with ruling coalition members the Social Democrats (SPD) was more categorical: "As of today, the merger is dead, there are no two ways about it," he told regional broadcaster HR.
Deutsche Boerse Chief Executive Carsten Kengeter said the merger still created opportunities despite the vote, pointing out that the German exchange was already active in other financial centers outside the European Union.
"The Brexit decision is a setback for Europe but it's also a good chance for a renewal and a constructive reform debate for the EU," he told national broadcaster ARD.
"To maintain economic strength that can then be translated into growth and jobs, we have to do all we can to combine the strengths of different financial centers rather than divide them," Kengeter said.
Earlier on Friday, the LSE and Deutsche Boerse vowed to press ahead with the merger, saying the vote outcome did not change the strategic rationale of the deal.
They have stressed that London's busy trading center and a post-trade hub in Frankfurt are highly complementary.
They say the merger's "liquidity bridge" would connect the investment community in London with companies that are the biggest users of capital on the continent, even if the UK is outside the EU.
Analysts said the exchanges were trying to put a brave face on the setback delivered by UK voters, with shareholders and regulators looking afresh at the LSE being outside the EU.
"It is now less likely that the deal will go through," Equinet analyst Philipp Haessler said.
The LSE and Deutsche Boerse boards urged shareholders on Friday to back the deal. LSE shareholders are due to vote on the deal at a general meeting on July 4 while Deutsche Boerse shareholders can tender their shares until July 12.
A special committee created by the exchanges to deal with the referendum would meet as often as needed to deal with the implications of Brexit, the companies said.
The terms of the merger agreement cannot be changed, however, Deutsche Boerse CEO Kengeter said.
But a source familiar with the merger plans said the question of the holding company's location was one of the main issues the committee would consider. Any change in company structure would have to take place after the deal had closed, which is currently expected in early 2017, the person said.
Shares in Deutsche Boerse closed 9.3 percent lower, lagging a 7 percent drop among German blue chip shares <.GDAXI>, while LSE's stock fell 8.6 percent.
(Additional reporting by Andreas Rinke in Berlin and Noor Zainab Hussain in Bengaluru; editing by David Clarke)