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David Wadhwani, senior vice president of digital media for Adobe, speaks during the launch of Adobe Creative Cloud and CS6 in San Francisco, April 23, 2012.

David Paul Morris | Bloomberg | Getty Images

Britain’s top competition watchdog said Tuesday that Adobe‘s proposed $20 billion acquisition of Figma could harm the U.K.’s digital design sector, findings that could mean a major setback for the merger.

The Competition and Markets Authority said the deal could “eliminate competition,” “reduce innovation” and “remove Figma as a threat to Adobe’s flagship Photoshop and Illustrator products,” according to a release. The findings are provisional, but the regulator said it will investigate potential remedies, “which could include blocking the deal outright.”

Adobe announced plans to buy Figma, which allows users to collaborate on app and website design, for $20 billion in September last year. In addition to regulatory probes in the U.K., the deal has been under scrutiny from the U.S. Department of Justice and the European Union.

“Our provisional conclusion is therefore that the Merger would remove competition between close competitors and an important competitive constraint on Figma, in a market in which Figma is already the strongest player by far and there are few other competitive constraints,” the CMA wrote in the release.

A representative for Figma told CNBC the company is “disappointed” by the CMA’s findings and that they “strongly disagree” with the idea that Figma competes with Adobe or will do so in the future.

“The facts are Figma operates in a dynamic and highly-competitive market for product design and development, and Figma has not spent a single dollar or hired a single engineer to build creative tools,” the spokesperson said. “We remain committed to the deal, confident in the facts, and convinced our proposed combination with Adobe is a win for consumers and should be approved.”

Adobe said it is “disappointed” and disagrees with the CMA’s perspective.

“Adobe and Figma will deliver significant value to customers,” Adobe told CNBC in a statement. “We are reviewing the provisional findings and will reengage with the CMA on the facts and merits of the case.”

David Wadhwani, a key Adobe executive behind the Figma deal, expressed frustration in October over the slow pace of regulatory approval. The company has previously said it expects to close the deal this year, and Adobe has agreed to pay Figma $1 billion if either the merger is not completed by March 2024 or it is rejected by regulators.

The CMA requested responses from Adobe and Figma by Dec. 19. The regulator said a final decision will be issued by Feb. 25 next year.

–CNBC’s Jordan Novet contributed to this report.

Watch: CNBC’s interview with Adobe CEO Shantanu Narayen

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