The U.S. Department of Justice may seek to block AT&T’s $85 billion takeover of Time Warner on antitrust grounds, the Wall Street Journal reported.

The DOJ is “actively considering” filing a lawsuit to halt AT&T’s takeover of the media conglomerate, per the WSJ report, over concerns that it would give the telco excessive market power. However, the regulatory agency also is in settlement talks with the companies that could lead to approval with conditions, according to the Journal report, which cited anonymous sources.

Time Warner shares fell more than 6% on the report, while AT&T stock climbed 1% before retreating into negative territory. [UDPATE: Time Warner stock closed down 3.8% Thursday, to $94.70 per share, and AT&T closed down 1.1%, to $33.17.]

By dangling the threat of a lawsuit, the Justice Department could be mainly trying to get leverage to extract more concessions from AT&T in how it’s allowed to operate the Time Warner divisions, which include Warner Bros., HBO and Turner. The WSJ report didn’t have details on what specific conditions the DOJ is seeking from AT&T but noted that typically in such cases the acquiring company agrees to divest certain assets to satisfy anti-competitive issues.

In a statement, an AT&T rep said, “When the DOJ reviews any transaction, it is common and expected for both sides to prepare for all possible scenarios. For over 40 years, vertical mergers like this one have always been approved because they benefit consumers without removing any competitors from the market. While we won’t comment on our discussions with DOJ, we see no reason in the law or the facts why this transaction should be an exception.”

Critics of the AT&T-Time Warner deal have charged that the resulting entity would be in a position to give preferential treatment to its own media and entertainment holdings over that of its rivals. That has included AT&T services that allow wireless subscribers to view AT&T-owned content without it counting against data caps, while programming from rivals do not get the same “zero rating.” Also among the areas of concern to competitors has been the ability of a combined company to extract more leverage in negotiations for carriage of Time Warner’s Turner and HBO cable channels.

This summer, AT&T — in a move that appeared aimed at alleviating regulatory concerns about the consolidation of Time Warner’s content divisions with the telco’s consumer services — said it would create a new media group separate from its wireless, broadband and pay-TV operations. That’s to be headed by John Stankey, previously CEO of AT&T Entertainment Group, who has previously overseen the DirecTV and U-verse businesses.

Last week AT&T and Time Warner announced the extension of the termination date of the merger agreement for a “short period of time” as the parties continued to work on approval from the Justice Department. There was some word in DC lobbying circles that the Antitrust Division was still taking depositions. AT&T avoided a more public, FCC review of its acquisition of Time Warner because it did not require the transfer of government licenses. Still, sources say that Justice Department attorneys spoke privately to many different players in the marketplace as part of their review.

Makan Delrahim, the antitrust chief, was confirmed by the Senate just last month, although the department’s review proceeded before his arrival.

Ted Johnson contributed to this report.