"Our preliminary conclusion is that Arcandor was already in difficulties before July 2008 - in other words its difficulties are not caused by the credit crunch," Jonathan Todd, a spokesman for EU Competition Commissioner Neelie Kroes, told AFP on Wednesday.
"Therefore it is not eligible for aid under the schemes which the Germans have put in place," he said.
Arcandor has applied for €650 million ($930 million) in loan guarantees and a credit line of €200 million from Berlin out of a government fund to help companies hit by Germany's worst postwar slump.
The company owns a 52-percent stake in Europe's second biggest tourism group Thomas Cook, the Karstadt chain of department stores and iconic shops such as the KaDeWe in what used to be the commercial heart of West Berlin.
On Saturday, Chancellor Angela Merkel's government agreed to support with billions of euros of taxpayers' money a takeover of General Motors' Opel unit by Canada's Magna and state-owned Russian lender Sberbank.
But Merkel has since insisted that Opel was a "special case" and on Wednesday Economy Minister Karl-Theodor zu Guttenberg said that Germany "has to stick to the rules."
"We received today a very clear call from Brussels that Arcandor was already a company in trouble as of July 1, 2008," zu Guttenberg told reporters.
"This negative condition is one which would fundamentally stand in the way of Arcandor qualifying for guarantees or loans as part of this Germany Fund."
The fate of Arcandor, which employs twice as many people in Germany as Opel, has become something of a political football ahead of general elections in September.
Frank-Walter Steinmeier, Merkel's centre-left Social Democrat (SPD) challenger for the chancellorship and current vice-chancellor, said that an insolvency of Arcandor would be the worst possible solution.
Finance Minister Peer Steinbrueck, Steinmeier's SPD ally, called on zu Guttenberg - from Merkel's conservative bloc - to conduct a proper review, saying "any public pre-commitment would be wrong."
For his part, zu Guttenberg stressed that no final decision had yet been taken.
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