The Australian Competition and Consumer Competition (ACCC) said market inquiries had raised concerns the proposed takeover may lessen competition to the extent it was likely to drive up prices.
Vocal opposition to the merger has emerged from steel makers in Asia and Europe amid concerns a combined entity could have enormous control over global iron ore and other resource commodity prices.
Rio Tinto is the world' second biggest producer of iron ore, while BHP Billiton is the third biggest.
The ACCC said "the merged firm may have the ability and incentive to influence global supply and global prices for iron ore".
However, the ACCC said the proposed takeover was unlikely to raise concerns about the supply of metallurgical coal, thermal coal, bauxite or alumina.
The ACCC said it anticipated completing further market inquires by September 5, with a final decision on the proposed takeover expected by October 1.
BHP Billiton has proposed an all-scrip takeover of Rio Tinto, valued at about $US150 billion ($A170.65 billion), which is now before regulators in the European Union.
Last month the US Department of Justice) and Federal Trade Commission granted early termination of the Hart-Scott-Rodino waiting period that satisfies part of the US merger control precondition of the proposed takeover.
The proposed takeover requires approval from regulators in the European Union, United States, Australia and South Africa.
