Stagecoach has been told it must sell Preston Bus to a rival operator by anti-monopoly investigators.
The Competition Commission has told Stagecoach it must sell its depot on Deepdale Road and a network of routes including services formerly run by Preston Bus.
Dr Peter Davis, who has chaired the probe into the merger, announced on Wednesday it had concluded that fares and service levels would be impacted by the merger.
Stagecoach slammed the decision as "perverse and irrational" and said it would be "reviewing it in detail" before deciding whether to appeal.
It added the decision set "a dangerous precedent for all sectors of the economy."
Dr Davis said: "We found that this merger resulted in a substantial reduction in competition that would, in our view, have an adverse impact on passengers in Preston, leading to a worsening in fares and other factors such as service levels.
"Without the merger, the competition each company would have faced would have ensured that it maintained or improved its services to attract passengers.
"To find the most suitable remedy to the problems generated by the merger we had to carefully consider the lost competition and also important issues such as the role of the bus network in generating customer benefits.
"Having done so, we came to the conclusion that the most effective remedy will be for Stagecoach to sell Preston Bus to a company capable of competing with it."
The 6.4m takeover was completed in January following a bitter 'bus war' on the city's most popular routes in summer 2007.
It described the 'wars' which led to both companies slashing prices and flooding popular routes with buses at the end of 2007 and early 2008 as "abnormal."
Stagecoach does have the right to appeal the Commission's decision to the Competition Appeal Tribunal.
A spokesman for the company said: "It is a perverse and irrational contradiction of competition law and common sense.
"The Commission decision is to restore a failed monopoly provider of local bus services and reverse the results of legitimate competition, which it is supposed to uphold.
"This decision risks setting a dangerous precedent for all sectors of the economy.
"What bus passengers, employees and local authorities want is a stable, comprehensive network of services and tickets, which Stagecoach has sought to provide.
"The Commission decision will ensure a further period of instability and uncertainty against the public interest.
"We shall consider the decision in detail before deciding on our next course of action."
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