A European court has annulled the EU's approval of a 2004 merger between Sony Music and BMG in a surprise decision that could force the world's second-biggest music company to be unwound.

Yesterday's unprecedented ruling by the European Court of First Instance also cast doubt on the viability of combining EMI Group and Warner Music, which are engaged in a duel to buy each other.

The European Commission said it would have to re-examine the merger that created Sony BMG, a 50-50 joint venture between Japanese electronics giant Sony Corporation and German media group Bertelsmann. It can also appeal the ruling.

The decision means Sony Music and BMG, home to such artists as Bruce Springsteen and Kelly Clarkson, would have to submit its merger plan again to the EC, which would then revisit it, taking into account updated industry information.

"If we were to give a red light, then the joint venture would have to be reversed," said Commission spokesman Jonathan Todd.

The court, in its first rejection of an EU decision, said too cursory an examination was conducted into whether there was already collective market dominance in the music industry and whether that dominance might grow following the Sony BMG deal.

"If new evidence or new submissions were to be involved, which they should be to take into account current market conditions, this process could be time consuming - even without any appeal to the European Court," said Ben Challis, a music lawyer.

"So unless the two companies unbundle themselves, it's a waiting game for either the appeal or the new decision."

EMI's shares tumbled more than eight per cent, giving back roughly half the gains accumulated since news of a possible deal with Warner first surfaced in mid-April.

"The share price is telling you that the deal's off, basically," said one fund manager.

EMI and Warner, the world's third- and fourth-largest music companies, respectively, have each offered about $4.6 billion (£2.51 billion) to buy the other, with both bids rejected.