The U.K. Competition and Markets Authority has stunned Wall Street by issuing a ruling that blocks Microsoft’s proposed $68.7 billion merger with video game publisher Activision Blizzard on grounds the megadeal would enable the U.S. software giant to unduly dominate the nascent cloud gaming space.

One thing’s certain, say media analysts: The U.S. tech giant’s proposed takeover has received a near-fatal blow in an essential gaming market. “For Microsoft and Activision, we suspect the CMA decision is a deal-killer,” Svb Securities Research analyst Clay Griffin argued in an April 26 investor note.

Despite the U.K. roadblock, shares in Microsoft ended Wednesday up $19.95, or just over 7 percent, at $295.37 after the tech giant beat revenue and earnings estimates for its first-quarter results on Tuesday, while Activision Blizzard saw its share price tumble by $9.93, or 11.5 percent, to $76.81.

The surprise British regulatory ruling comes over a year after Microsoft,...