The US Department of Justice (DoJ) is suing Oracle to prevent its attempted hostile takeover of PeopleSoft.

The government department filed a lawsuit yesterday stating that if the deal went ahead, it would eliminate competition between two top providers of enterprise software, resulting in higher prices and fewer choices for customers. It quotes Oracle, PeopleSoft and SAP as the only companies that can meet the needs of large organisations in this area.

The attorney generals of Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota and Texas have also joined the DoJ lawsuit.

The decision to sue follows PeopleSoft's assertion a fortnight ago that the DoJ has decided to block Oracle's acquisition.

Executives from Oracle, which maintains that the enterprise software market is highly competitive, said they would work to change the agency's mind but indicated that if the DoJ moved to block the acquisition, it would consider fighting it in court.

It called the DoJ's lawsuit one "without basis in fact or law" and claimed it has been adversely influenced by an "aggressive lobbying campaign" by PeopleSoft's management. Oracle restated its position that an Oracle/PeopleSoft merger would benefit both companies' employees and shareholders.

In its defence, Oracle plans to draw parallels to the DoJ's 2001 attempt to block SunGard Data Systems' acquisition of Comdisco. In that case, the DoJ also said that the deal would reduce the market for disaster recovery services from three major vendors to two and so sued to prevent the merger. The District Court of Columbia rejected the DoJ's arguments and allowed the acquisition to proceed.

Oracle also intends to argue that the enterprise software market extends beyond its three largest vendors. Smaller ERP companies including Lawson and SSA Global's Baan, integrators such as IBM and Accenture, and new entrants including Microsoft compete for many deals and affect industry pricing, Oracle claims.

The DoJ said however it is confident it has a strong case to take to trial and denied its decision was improperly influenced by either company's management and claimed it had ample data to back its anti-trust argument, although declined to give any details.

PeopleSoft CEO Craig Conway called for Oracle to abandon its bid. The decision was "the antitrust day of reckoning", he asserted and pleaded for both companies to be able to devote their energies to serving their customers and competing in the market.

Oracle's takeover campaign began in June when the company submitted to PeopleSoft's shareholders an unsolicited tender offer for control of the company. The all-cash offer has been raised twice and is now valued at $9.4 billion (£5.1bn). Oracle is offering $26 (£14) per PeopleSoft share - higher than the shares have traded in the past year. Following news of the DoJ's lawsuit, shares of PeopleSoft fell 2 percent, while Oracle shares lifted 1 percent.

The next key juncture for the bid is PeopleSoft's annual shareholders meeting, scheduled to take place on 25 March. Oracle proposed its own slate of nominees for PeopleSoft's board of directors, in the hope of landing control of a majority of the board. If Oracle's slate is elected, it could strip PeopleSoft's bylaws to ease the deal through and more directly encourage shareholders to vote in favour.