Shares in Yellow Pages owner Yell plunged yesterday after the competition watch-dog warned the group was so dominant in the directories market that smaller rivals were struggling to compete.
The Competition Commission, which has been investigating the classified directories market for the last nine months, also said Yell's "strong position" could lead to advertisers being forced to pay higher prices if a current price cap was removed.
Although the Commission said it had not yet reached a decision on whether to intervene in the market, City analysts said it was now "unlikely" the price cap would be lifted.
The fear is that growth at the telephone directories publisher could be curbed.
However, the company hit back and insisted that regulation was no longer required as competition in the market was increasing.
In April last year the Office of Fair Trading asked the Commission to investigate concerns that competition in the classified directories market was not working.
In a "latest thinking" document, the Commission said Yell remained "by far the largest provider in a highly concentrated market" despite the presence of Thomson Local Directories and BT.
"It benefits from a network effect, which arises when increasing numbers of advertisements in a directory attracts an increasing number of users which in turn attracts more advertisers," it said. "The network effect strengthens the position of the existing providers and operates as a barrier to entry."
Inquiry chairman Diana Guy said a final conclusion had not been reached, but conceded: "Yell's strong position may give it market power and it seems likely that the prices offered to a significant number of advertisers across the market would be higher than at present without the current price cap."
The Commission added that revenues for printed classified directories continued to rise despite the presence of the internet.
Ms Guy said: "Our research appears to indicate that relatively few companies view the internet as a substitute for advertising in printed directories."
Although the watchdog's final report is not due until August, the announcement was met with concern by investors.
Numis Securities' Lorna Tilbian said the Commission's findings were a "tougher regulatory" view than some in the industry had expected.
But in a research note she said the most likely outcome was to retain existing price controls on the directories market.
"In our view, this will still enable Yell to produce modest growth - but prodigious cash generation - from the UK," she added.
Seymour Pierce analyst Charles Peacock said: "At this stage it looks unlikely that there will be a removal of regulation or possibly even a relaxation in the price cap."
Yell, which has used actor James Nesbitt in a high-profile advertising campaign in the UK, is also the largest independent directory publisher in the United States.
It argued that competition in the sector was growing, with BT re-entering in 2003 and the potential of the internet.
Yell chief executive John Condron said: "The impact of this increasing competition has been to spur Yell into consistently improving its efficiency, customer service and customer value for money.
"Yell has cut its prices by an average of just under 30 per cent - substantially more than the regulation itself required.
"We will continue to fiercely contest that, in such an environment, regulation is no longer required." Shares closed down 20p at 5071/4p.