Britvic also suffered with £100m knocked off its value as the City reacted with surprise to the announcement.
The Office of Fair Trading (OFT) decided to refer the deal to the Competition Commission after raising concerns it may lead to higher prices for consumers and reduced competition among certain soft drink brands.
The referral means the merger offer has now lapsed as it will not be completed within the original timetable.
The completion date had already been pushed back from January 30 to February 26 after the OFT wanted more time to make its decision.
The lapsing of the deal means AG Barr and Britvic, which has its headquarters in Hertfordshire, will have to draw up new offer documents and return to shareholders for approval if the Com-petition Commission rules the merger can go ahead.
Amelia Fletcher, OFT chief economist and decision maker in the case, said: "The soft drinks industry is an important one for many consumers in Britain.
"People spend over £9bn each year on these drinks.
"This merger will see the UK market reduce from three to two main players. Our investigation has identified competition concerns relating to this deal with respect to Barr's Irn-Bru and Orangina brands which could lead to higher prices for consumers.
"In addition, we could not rule out the possibility of further competition concerns arising from combining the overall Britvic portfolio of soft drinks with the entire Barr portfolio. We are therefore referring the merger to the Competition Commission for an in-depth investigation."
As well as Irn-Bru, Cumbernauld-based AG Barr – headed by chief executive Roger White – has Tizer, Orangina, Strathmore Spring Water and Rubicon in its portfolio.
Britvic has Fruit Shoot, Tango and Robinsons plus an exclusive bottling arrangement with PepsiCo in the UK for brands such as Pepsi, 7UP, Gatorade and Mountain Dew.
The other big player in the UK soft drinks market is Coca-Cola Enterprises.
Both AG Barr and Britvic are understood to believe their tie-up will not lead to competition problems.
The Competition Commission is expected to report by July 30 but can extend that by a further eight weeks.
The lapsing of the offer will be a blow to Edinburgh-based law firm Dickson Minto, legal adviser to AG Barr, which was reportedly in line for a £1m completion fee on the deal.
In January, AG Barr indicated it was on course to raise full year revenue by 7% to around £253m.
Yesterday, AG Barr's shares closed down 39.5p, or 7%, at 515.5p, meaning its market capitalisation dropped from £648m to £602m.
Britvic's shares ended the day at 420p which was a fall of 40p, or 8.7%. That movement saw its market capitalisation dip from £1.12bn to £1.02bn.
In a separate announcement, Britvic promoted Simon Litherland, managing director of its Britvic GB arm, to group chief executive with immediate effect.
He replaces the retiring Paul Moody who is being retained on a six-month consultancy basis to ensure a smooth handover.
The company added it expects to report earnings before interest and tax in the range of £125m to £131m.