The Justice Department announced Thursday that it will allow the creation of the world's largest stock exchange operator after the German conglomerate that wants to buy the New York Stock Exchange sells its stake in a third, smaller American stock exchange operator.

Justice Department lawyers filed papers in U.S. District Court in Washington that would allow the merger of NYSE Euronext and Deutsche Boerse AG after the German company orders one of its subsidiaries to sell its 31.5 percent stake in Direct Edge Holdings LLC, which is the United States' fourth largest stock exchange operator. In addition to the sale of Direct Edge, the proposed settlement between Justice and the two companies prohibits them from participating in the business or running of Direct Edge.

The German company, which operates the Frankfurt stock exchange, offered to buy NYSE Euronext for $10 billion in February. The transaction would create the world's largest exchange operator. NYSE Euronext owns exchanges in Paris, Lisbon, Brussels and Amsterdam, in addition to New York.

"Without the divestiture and other restrictions obtained by the Justice Department, a combined NYSE and Deutsche Borse entity could influence the actions of Direct Edge, and thereby lessen the zeal of an aggressive and innovative exchange competitor," said Sharis A. Pozen, acting assistant attorney general in charge of the Justice Department's Antitrust Division. "The remedy ensures that participants in the markets for U.S. equities exchange products and services will continue to receive the full benefits of robust competition in the form of competitive prices and increased innovation."

Under the terms of the settlement, Deutsche Borse's subsidiary, ISE, will divest itself of its interest in Direct Edge within two years.

The Deutsche Boerse-NYSE Eurostar merger would not only control important stock markets on both sides of the Atlantic, but also have a potentially dominant position in the trading of derivatives. Derivatives are complex financial products that allow investors to bet on movements in areas such as interest rates, stock indexes or commodity prices.

The combination of the two exchanges has been harshly criticized by competitors like the London Stock Exchange and U.S.-based Nasdaq.