By Jonathan Gould and John O'Donnell
FRANKFURT (Reuters) - Germany's financial market regulator delivered a double blow to London on Tuesday, saying it could not host the headquarters of a planned European stock exchange giant after Britain leaves the EU, and nor could it remain a center for trading in euros.
Felix Hufeld, who heads the Bafin regulator, is the most senior official to rule out publicly London as the head office of the merged Deutsche Boerse-London Stock Exchange group after Britons voted last week to leave the European Union.
"Without doubt ... it is hard to imagine that the most important exchange venue in the euro zone would be steered from a headquarters outside the EU," Hufeld told reporters. "There certainly has to be an adjustment here."
Hardening positions in Germany, where politicians have made similar remarks, have created an additional hurdle to the planned $25 billion merger, which is now in danger of unraveling after Britain opted from Brexit.
Deutsche Boerse (DE:DB1Gn) declined to comment. An LSE (L:LSE) spokesman said shareholders would vote on the deal on July 4 and the offer terms were unchanged.
As Germany's top supervisor, Hufeld's comments hold considerable weight and jar with recent statements from the LSE and Deutsche Boerse that the deal to create a European trading powerhouse will go ahead as is.
Bafin answers to Germany's finance ministry - led by minister Wolfgang Schaeuble. A spokeswoman for the ministry said supervisory authorities continued to examine the merger.
A special committee created by the exchanges to deal with the referendum fallout will meet in the coming weeks to discuss the implications, including for the merged company's base.
Hufeld, who also sits on the European Central Bank's supervisory decision-making board, also said that London could no longer expect to be the center of euro-denominated trading.
Such trading should move to the EU and could take place in Frankfurt, he said.
"I would see this as a significant political goal to think about steps to encourage this. It cannot be politically smart for a significant amount or a majority of euro-denominated trading ... to take place outside the European Union."
The loss of trading of euros in derivatives would be a heavy blow to London.
Before the vote, euro zone officials had told Reuters that the ECB was determined to tackle an anomaly dating from 1999 when Britain opted out of the euro's launch - that a dominant share of trading in the currency the ECB issues happens outside its jurisdiction in London.
When Britain leaves the EU, there is little incentive to keep this business there. Trading of euro-based securities spans trillions of euros of derivatives as well as the "repo" market providing short-term funding for banks – 2 trillion euros of which experts say is based in London.
On top, there is foreign exchange trading in the currency itself. The Frankfurt-based ECB wants oversight for practical reasons: if any disaster were to hit these markets, it would be responsible for clearing up the mess.