California, one of the states investigating the antitrust implications of Oracle Corp.'s proposed $7.3 billion takeover of PeopleSoft Inc., likely will decide whether to pursue a legal challenge of the deal in the next month, a source familiar with the antitrust probe said Friday.

California Justice Department staff members are still gathering and analyzing information to determine if the proposed merger would lead to higher prices and cripple competition.

"There has been no recommendation to (Attorney General) Bill Lockyer yet," said another source familiar with the probe.

In June, the state of Connecticut, a PeopleSoft customer, filed a lawsuit to block the proposed merger. Other states, including California, Texas and Colorado, joined a task force to probe the merger.

"We are continuing to look at the proposed transaction," said Tom Dresslar, spokesman for the California Attorney General.

The state attorneys general have been conducting their probe separately from the Justice Department, which is beginning to wrap up its investigation. If the Justice Department gives Oracle the go ahead for the takeover, the state attorneys generals could step in and file their own antitrust suit.

But a published report Friday said the Justice Department is sending strong signals that it will challenge Oracle's hostile bid.

The Wall Street Journal reported Friday that Justice Department staff members are leaning toward recommending to R. Hewitt Pate, chief of the Justice Department's antitrust division, that the government challenge the deal in federal court in San Francisco. It cited an unnamed attorney who also said that a deposition of Oracle CEO Larry Ellison this week emphasized concerns that the proposed takeover could whittle the business software market down from three major competitors to two, Oracle and Germany's SAP.

A source familiar with the matter said the Department of Justice is still gathering evidence in its nearly seven-month-long probe and likely will reach a final decision on whether to block the deal in late February or early March.

Despite the latest speculation, Oracle said Friday it believed the Justice Department would ultimately see the merits of its bid.

"We remain confident that as the Department of Justice learns more about this industry, they will see this transaction as pro-competition," Jennifer Glass, a spokeswoman for Oracle, said.

"Our entire argument is that this is a highly fragmented market, with Microsoft poised to enter," she added. "Our entire argument is that the 3-to-2 supposition is inaccurate and we've been saying that since June."

Federal antitrust regulators started taking a harder look at Oracle's bid for PeopleSoft in July, putting the deal on hold. European regulators recently suspended their review of the deal, which was to be completed by March 30.

Speculation has run rampant for months that the Justice Department might oppose the bid. Several months ago, the Justice Department began gathering from PeopleSoft customers sworn statements that could be used if it decided to challenge the deal in court. Oracle dismissed the rumors, saying that the customer interviews were standard.

Antitrust experts said that though the Justice Department staff might be inclined to recommend a challenge to the merger, the decision could still swing in the opposite direction.

"All of these things are signs of a continuing, thorough investigation," said Howard Morse, a partner with Drinker Biddle & Reath and a former federal antitrust official. "Oracle ultimately could be successful. ... The bottom line is until Hewitt Pate makes his decision, it's all speculation."