In a ruling with huge repercussions for CNOOC Ltd's proposed $15.1 billion takeover of Nexen Inc, Industry Minister Christian Paradis said the C$5.2 billion ($5.3 billion) bid by Petronas would not be of "net benefit" to Canada.

Although Paradis gave no reasons, Prime Minister Stephen Harper is facing legislators unhappy with the idea of doing business with China and also of letting foreign state-owned enterprises buy Canadian energy assets.

The decision - announced at three minutes to midnight on Friday and missing the deadlines for all Canadian newspapers - surprised senior officials in the government and was a painful reminder to markets of how Ottawa vetoed BHP Billiton Ltd's proposed takeover of fertilizer maker Potash Corp in late 2010.

After the Potash decision the government spent many months trying to reassure markets that Canada was still open for business. That effort continues today.

Yet for all the talk of attracting investment, some firms are clearly less welcome that others, particularly state-owned enterprises such as Petronas and CNOOC, which critics complain do not play by market rules.

"We've joined a list of countries in which a lot more resource nationalism is being practiced ... starting with Potash, muscle had started to be exercised a little bit," said John Manley, a former industry and finance minister who now chairs the Canadian Council of Chief Executives.

"And I think that's something that is not a total disaster but it does cry out for some clarification so investors know what they're dealing with," he told Reuters.

Fund managers and arbitrageurs expressed frustration that Ottawa did not explain the decision.

Harper's chief spokesman, Andrew MacDougall, declined to comment, but noted that Petronas has 30 days to make changes to the bid.

Although Harper is secure - his party has a majority in the House of Commons and the next election is three years away - he is acutely sensitive to political criticism and has cited opinion polls opposing the CNOOC move.

OPAQUE PROCESS

The official opposition New Democrats, who say the CNOOC bid must be blocked, decried what they said was an opaque process for studying foreign takeovers.

"There will be serious implications if they keep making things up on the back of a napkin. Investors will lose confidence ... . This is no way to run a large economy," said Peter Julian, the party's natural resources spokesman.

One senior North American financial professional told Reuters that the Petronas move was "very bad for Canada. This is shocking ... . The tone out of the Harper government is not good."

Harper has to ensure Canada can attract hundreds of billions of dollars in foreign investments for the energy patch while placating his Conservative caucus, where suspicion of China is widespread.

"One obvious explanation is that this could be a step for Ottawa to increase the role of the state and to begin doing fairly regular interventions," said Wenran Jiang, a senior fellow at the Asia-Pacific Foundation and an energy adviser to Alberta, a province with huge energy reserves.

"It might be a way to make the rejection of Nexen look easier, saying 'We already rejected a Malaysian takeover' ... but in both cases the rejection (would) need to have convincing reasons," he told Reuters.

Canadian legislators are also unhappy about what they say are the problems facing Canadian firms in China, such as red tape and restrictive regulations.

Government officials have repeatedly stressed that they want to see more reciprocity from China, and the Petronas decision could be a way of exerting pressure on Beijing to make life easier for Canadian firms.

"The Canadian government is sending a message that if you want to get into Canada, you're going to have to make sure that it's beneficial to Canada. That's not necessarily, in my view, a bad thing, especially when it comes to strategic resources," said Martin Pelletier, portfolio manager with Trivest Wealth Counsel in Calgary.

"But we also have to balance that with the need for capital to develop those resources because the public market just isn't there at the moment to provide that capital to Canadian companies," he said. ($1=$0.99 Canadian)

(Additional reporting by Jeffrey Jones in Calgary; Editing by Christopher Wilson)

• A Permanent Economic Emergency