Shares in Allergan opened over 15% lower on Wall Street, a day after the US Treasury Department proposed new tax regulations that analysts said could kill its $160 billion agreement to be bought by Pfizer.
Pfizer's deal to buy Dublin-based Allergan was conceived under rules that would have allowed the company to move its headquarters to Ireland and lower its tax rate.
The US government has been trying to stop that type of deal, called a tax inversion.
The Treasury Department last night introduced a regulation that would negate the tax benefits of Pfizer's acquisition of Allergan.
Pfizer shares rose 1.6% is US trade today.
Analysts said that Allergan's share losses shows that the market thinks the deal is almost dead.
Pfizer said last night that it was reviewing the notice and declined to speculate on whether the deal would go forward.
The changes follow sharp political criticism of Pfizer's and Allergan's merger, which would be the largest inversion deal ever.
While the rules did not single out this deal, one of the provisions takes aim directly at it.
The US Treasury said in a statement it will impose a three-year limit on foreign companies bulking up on US assets to avoid ownership limits for a later inversion deal.
These deals include the $66 billion merger of Allergan and Actavis, the $25 billion purchase of Forest Laboratories and the $5 billion takeover of Warner Chilcott.
Under the agreement between Pfizer and Allergan, either party may terminate the deal if an adverse change in US law would cause the combined company to be treated as a US domestic corporation for federal income tax purposes.
The terminating party would have to pay the other company up to $400m for its expenses, according to the merger agreement.