The European Union has begun a full investigation into BHP Billiton's proposed $170billion (£85.8billion)takeover of Rio Tinto, its rival.

The EU's competition watchdog said that there were sufficient concerns about the integration of the world's largest and second-largest miners for further study to be needed. The EU has already examined the deal for two months and will now spend another six looking into the ramifications of BHP's offer.

Rio Tinto, which has rejected the BHP approach claiming that it undervalues the company, welcomed the decision. BHP this week received regulatory clearance from the United States Department of Justice to proceed with the deal, but the EU and Australian competition reviews are considered more important.

If the EU or Australia requires BHP to divest large parts of Rio for the takeover to go through, it could scupper the deal. Should competition regulators give their blessing to the deal, Rio shareholders will have to vote on the proposal.

BHP is offering 3.4 of its shares for every one Rio share in a deal that will create a huge merged multinational company with a market capitalisation of about $350 billion.

The EU said: “Concerns arise in particular as regards the markets for iron ore, coal, uranium, aluminium and mineral sands, because the proposed takeover could result in higher prices and reduced choice for these companies' customers.”

Steel companies are particularly concerned about the proposed deal because a combined BHP-Rio would control 36 per cent of the world's iron ore - the raw material that is used to make steel.

The International Iron and Steel Institute (IISI), which is based in Brussels, has called on antitrust regulators to block the tie-up, warning that such a deal would create a “virtual monopoly” in iron ore mining.

Neelie Kroes, the EU's Competition Commissioner, said: “The recent surge in commodity prices has had a serious impact on the industries buying these commodities, their customers, and ultimately all the consumers in Europe and elsewhere in the world. In this very sensitive context any change making the situation worse could be extremely harmful.

“Therefore the commission will pay particular attention to ensure that this takeover does not adversely affect competition in Europe.”

Separately, BHP said yesterday that it had matched Rio Tinto with a near- doubling in iron ore prices, ending months of talks with steel makers.

BHP secured a 96.5 per cent increase for iron ore lumps and a 79.88 per cent increase for refined ore from China's Baosteel for 2008-09, and will roll out these price rises to other customers in Asia.

BHP's share price rose 14p to £17.63 and Rio Tinto's rose 140p to £56.

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