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SAO PAULO (Reuters) - Brazil's government will withdraw its financial and political support for a controversial tie-up between retailer Pao de Acucar and the local unit of France's Carrefour, a government official said on Monday, dealing the plan a severe blow.
The complex deal, which was announced last month, depended on financing from Brazil's BNDES state development bank. But the transaction ran into strong resistance from Carrefour's French rival Casino (CASP.PA), which is a major Pao de Acucar shareholder and has the ability to veto any deal.
Apparently surprised by the vehement opposition to the deal from Casino -- which deemed the proposal "expropriation" -- and the Brazilian public, President Dilma Rousseff's government has now opted to withdraw its support, the official said.
"There is disappointment with the way the deal was handled ... and (Rousseff's) Cabinet has decided to withdraw government support for the (BNDES) financing," the official told Reuters. The official spoke on condition of anonymity to discuss internal policy developments.
The official said the Brazilian government could reevaluate the deal if its terms are modified.
A spokesman for Rousseff's government declined comment. A spokesperson for Pao de Acucar did not immediately respond to a request for comment.
The comments amount to yet another surprise in the deal, which has pitted Casino and Carrefour against each other in an acrimonious battle for the biggest retailer in Brazil, one of the world's fastest-growing consumer markets.
The shares of all three companies have been volatile since the deal was announced on June 28. Many investors at first bet the deal would go through, but have since become more skeptical as Brazilian officials began to back away from their support, which was seen as critical to overcoming Casino's opposition.
Pao de Acucar's Chairman Abilio Diniz said last week he had unspecified alternate sources of funding lined up for the deal if the BNDES pulled out.
Diniz will be in Paris on Tuesday to attend an extraordinary meeting of Casino's board and answer questions about the deal, Pao de Acucar said in a statement.
Casino Chief Executive Jean-Charles Naouri has said the proposal amounted to "expropriation," suggesting it plans to continue to fight the deal. Under the terms of a prior agreement, Casino had an option to acquire control of Pao de Acucar from Diniz next year.
Carrefour, for its part, said it had no plans for a hostile bid -- suggesting it was shying away from a confrontation.
The proposal, which was made by a Brazilian investment fund with a pledge of government support, is valid for 60 days.
In addition to the opposition from Casino, the deal was intensely criticized by some Brazilian lawmakers and business leaders who accused Rousseff of essentially using taxpayer funds to help Pao de Acucar break its contract with Casino.
In the days after the deal was announced, some Rousseff senior officials defended it by saying it would keep Pao de Acucar in mostly Brazilian hands and allow the company to expand its presence throughout Latin America.
Reporting by Brian Winter; editing by Tim Dobbyn and Andre Grenon