Regulators and a senior conservative politician in Germany on Friday contested plans for a merged Deutsche Boerse-London Stock Exchange to be based in London, raising doubts about whether the deal can be completed following Britain's vote to leave the EU.
Deutsche Boerse and LSE agreed in March to combine in a $30 billion deal 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 there was increasing scepticism about a London 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.
The exchange regulator in the German state of Hesse, where Deutsche Boerse is based and which has the power to block the merger, declined to comment.
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."
Earlier on Friday, the LSE and Deutsche Boerse vowed to press ahead with the merger despite Britain's vote to leave, saying the outcome of the referendum did not change the strategic rationale of their plans.
They have stressed that vast trading activity in London 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.
"It is now less likely that the deal will go through," Equinet analyst Philipp Haessler said, adding that shareholders and regulators would need to refresh their view of the merger plans now, with the LSE outside the EU.
"We don't know how connected the UK will be with the EU in five years' time, maybe they will even be fully separate and not like Switzerland or Norway," he said, referring to the special political, trade and financial arrangements countries outside the EU have negotiated over the decades.
The boards of the LSE and Deutsche Boerse on Friday urged their shareholders to back the deal. LSE shareholders are due to vote on the merger at a general meeting on July 4. Deutsche Boerse shareholders may tender their shares until July 12.
The exchanges said on Friday that a special committee they created to deal with the referendum, chaired by Deutsche Boerse Chairman Joachim Faber, would meet as often as needed to deal with the implications of the Brexit vote.
A source familiar with the merger plans said the question of the location for the holding company was one of the top issues the committee would consider. Any changes in company structure would have to take place after the deal had closed, currently expected in early 2017, the person said.
Shares in Deutsche Boerse fell 7 percent by 1222 GMT, broadly in line with a 7.1 percent drop among German blue chip shares, while LSE's stock was down 8.7 percent.