Centrica is being barred by the government from making a solo bid for British Energy, according to one of the nuclear generator's largest institutional shareholders.

The shareholder, who spoke on condition of anonymity, also questioned why preferred bidder EDF retains the 'irrational total support' of the government.

He said that a merger with Centrica to create a British champion would be better for shareholders because they could get a higher price and retain shares in the combined entity. 'But Centrica is unable to do a deal because the government is discouraging it,' he added.

Takeover talks between French group EDF, run by Vincent de Rivaz in the UK, and British Energy, continue to drag on. A £10bn, 765p per share all-cash deal with EDF was almost clinched at the beginning of the month. But British Energy's two largest institutional shareholders - Invesco and M&G, owning about 22 per cent of the company - rejected it at the eleventh hour, saying the offer was too low. They believe that soaring electricity prices justify a bid closer to £10 per share.

Last week, Secretary of State for Business John Hutton reiterated the government's backing for a takeover of British Energy, in which it holds a 35 per cent stake, by EDF.

The government prefers the French suitor because it has a good track record in operating modern reactors. Centrica has no nuclear industry experience.

Ministers want a deal concluded soon so that EDF can kick-start the building of a new generation of reactors on British Energy's existing sites and avert an energy crisis.

Last week, fund manager Neil Woodford of Invesco, which holds almost 15 per cent of British Energy shares, made a presentation to the Shareholder Executive, which oversees the government's holdings. Woodford urged officials to reconsider a merger with Centrica as an alternative to the EDF deal.

Centrica does not want to antagonise the government by making a bid which is clearly not welcome. It also hopes to benefit from an EDF takeover by snapping up a large minority stake in British Energy, and wants to keep this option open.

Speaking to The Observer, the top-four shareholder said that British Energy, EDF, Centrica and the government were engaged in an 'unsightly quadrille'. He added that unless EDF 'materially improved' its offer, he would continue to reject its advances.

EDF tried to sweeten its bid by offering to include complicated securities called SVRs, which would increase the payout to British Energy shareholders as electricity prices rose. 'It seems bidders only use this type of thing when they don't have the resources to buy a company,' he said.

Hutton said last week that a deal between EDF and British Energy could be done in the next fortnight. Sources close to the talks said it would probably take longer.