(LUXEMBOURG) - Europe's highest court ruled Thursday that Spain illegally defied EU demands to drop restrictions on a foreign takeover of a power company in a case that fuelled fears of protectionism between European nations.

The European Court of Justice said Spain had broken EU law by not withdrawing restrictions on Endesa's takeover by German energy group EON as the European Commission had ordered it to do.

"Spain has failed to fulfil its obligations under community law," the Luxembourg-based court ruled, upholding a case by the European Commission against Madrid.

The long-running case goes back to February 2006 when EON launched a hostile takeover offer for Endesa which the Spanish government fiercely opposed even though EU antitrust regulators gave their blessing to the deal.

Spanish authorities subsequently imposed a series of restrictions on the takeover, which the European Commission said broke EU rules enshrining the free movement of capital within the bloc.

As Madrid refused to withdraw the conditions, the European Commission -- the guardian of the EU's governing treaties -- brought the case before the court.

The standoff fuelled fears in Brussels at the time about a growing protectionist trend between EU nations, especially in the strategic energy sector.

Such fears were further fanned when Paris orchestrated the merger of energy group's Suez and GDF to thwart a bid by Italian energy company Enel for Suez, and Hungary introduced laws to block an Austrian takeover of an energy group.

In the meantime, EON dropped its bid for Endesa in April 2007, leaving the way clear for a bid by Enel and Spanish construction group Acciona.

In July, the Spanish government gave the green light to the Spanish-Italian bid but attached a string of conditions, prompting the commission to launch further legal action against Madrid.

Among its conditions, Madrid said Enel must guarantee supplies of natural gas to the Spanish market and present a detailed report explaining its strategy or outlining any agreements that could affect the public interest or put supplies at risk.

Commission spokesman for competition issues, Jonathan Todd, hailed the court ruling as an important precedent, strengthening the commission's authority to ensure EU competition law is fully respected.

"The importance of this ruling is above all the case law that it establishes," he said.

"It clarifies member states' obligations and therefore we would expect Spain and other member states to take due note this ruling and respect community law," he added.

Judgment of the European Court of Justice in Case C-196/07 (pdf)
Commission / Spain

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