BRUSSELS (From news reports) - A proposed paper joint venture between Finnish forestry group UPM-Kymmene and South African-listed wood fibre producer Sappi may reduce competition and lead to price hikes, EU antitrust regulators warned on Tuesday as they opened an investigation into the deal.

The move will likely require the companies to offer concessions such as asset sales to address the competition concerns.

The 1.42-billion-euro ($1.7 billion) tie-up seeks to combine UPM's communication papers unit and Sappi's graphic paper business in Europe and comes as the industry grapples with falling demand, structural overcapacity and high energy costs.

The European Commission, which acts as the EU competition enforcer, singled out UPM and Sappi's market power as major suppliers of coated mechanical paper (CM) and wood free coated (WFC) paper in Europe and rivals between themselves.

It said rivals would not have the ability or incentive to offset any price hikes by the joint venture.

"The transaction could result in a reduction of production capacity in those markets, along with higher prices and lower quality of CM and WFC paper for customers, which include printers and publishers," the Commission said in a statement.

UPM said it continues to engage constructively with the EU watchdog.

"UPM remains convinced of the joint venture's benefits to customers and the entire industry by strengthening the resilience of European graphic paper supply in declining markets," the company said in a statement.

It will issue its decision by October 26.