Canada blocked Petroliam Nasional Bhd's C$5.2 billion ($5.23 billion) takeover of Progress Energy Resources Corp, saying the bid by the Malaysian State-owned company wasn't in Canada's national interests.

In what investors say is a test case for the $15.1 billion bid by China National Offshore Oil Corp for Calgary-based Nexen Inc, the Canadian government said it "was not satisfied that the proposed investment is likely to be of net benefit to Canada", according to an Oct 19 statement from Industry Minister Christian Paradis. The minister wouldn't comment further.

The rejection is Canada's second in two years following the 2010 failure of BHP Billiton Ltd's $40 billion bid for Potash Corp of Saskatchewan Inc. In both decisions, government officials gave little explanation for their reasoning.

"It could be the death knell of Nexen if the grounds are around reciprocity and state-owned enterprises," said Jack Mintz, director of the University of Calgary's School of Public Policy. Canada's foreign-investment rules remain vague. Mintz added: "The government needs to send a clear signal on what's on and what's off in terms of foreign investment."

Prime Minister Stephen Harper has touted Canada as an energy superpower and is seeking deeper trade ties with China and India to diversify exports away from the slower-growing United States market, which consumes three-quarters of Canada's exports. Canada's foreign-takeover laws require acquisitions offer a "net benefit" to the country.

"We're very surprised by the decision," Progress Energy Chief Executive Officer Michael Culbert said by phone from Calgary after the decision was released two minutes before a midnight deadline for the review.

Petronas will appeal against the ruling and Progress Energy will "help where we can help", Culbert said. "We believe that the transaction is of net benefit to Canada. Progress will continue to work with the federal government to prove that point."

Azman Ibrahim, a spokesman for Petronas in Kuala Lumpur, declined to comment when contacted by Bloomberg News.

Canada's gross domestic product of $1.74 trillion exceeds Malaysia's annual output of $279 billion, according to data compiled by Bloomberg.

Progress Energy closed at C$21.65 on Oct 19 in Toronto, down 0.9 percent and below the C$22 a share offer from Petronas. Nexen shares dropped 1.5 percent to $25.40 in New York, 7.6 percent less than the $27.50 offered by Beijing-based CNOOC. It was the biggest drop in three months for Nexen.

Harper said on Sept 6 his government is preparing a "policy framework" for foreign investment to clarify issues raised in takeovers such as CNOOC's offer for Nexen.