WASHINGTON (CNN) - Federal regulators sued to block Oracle Corp.'s $9.4 billion bid to buy PeopleSoft Inc. on Thursday, saying the proposed merger would reduce competition in the software industry.

Oracle vowed that it would fight back.

"If the merger were allowed to proceed, it would eliminate competition between two of the nation's leading (software) providers... resulting in higher prices, less innovation and fewer choices" for business and government agencies, the Justice Department said in a statement.

Read the lawsuit • U.S. vs. Oracle (PDF)

"We believe this transaction is anticompetitive -- pure and simple," said Assistant Attorney General R. Hewitt Pate, who oversees the department's antitrust division. "Under any traditional merger analysis, this deal substantially lessens competition in an important market."

Oracle announced late Thursday that it would "vigorously challenge" the ruling. "We believe that the government's case is without basis in fact or in law, and we look forward to proving this in court," said Oracle spokesman Jim Finn in a statement.

Oracle also said that since the legal challenge would not be resolved by the end of March, it is withdrawing its slate of candidates for PeopleSoft's board at the company's annual meeting. That meeting is set for March 25 and Oracle had hoped to elect members to PeopleSoft's board that would agree to a takeover.

Oracle also extended its tender offer for PeopleSoft shares until June 25. The offer was set to expire on March 12.

The civil antitrust lawsuit was filed in U.S. District Court in San Francisco. Attorneys general in Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota and Texas joined the federal government in bringing suit.

The move came after staff lawyers at the antitrust division had recommended action against the deal.

Oracle said the Justice Department's lawsuit was a misguided move that came after aggressive lobbying by PeopleSoft management.

YOUR E-MAIL ALERTS Lawsuits Justice and Rights Mergers - Acquisitions - Takeovers PeopleSoft Incorporated or Create your own Manage alerts | What is this?

PeopleSoft said Oracle should drop its bid because of the lawsuit, Reuters reported.

Oracle raised its hostile offer for PeopleSoft to $26 a share, or about $9.4 billion, earlier this month.

Shares of Oracle (ORCL: Research, Estimates) rose slightly in trading on Nasdaq on Thursday while shares of PeopleSoft (PSFT: Research, Estimates) sank 1.6 percent.  

-- from CNN's Terry Frieden and staff and wire reports