"The FTC asks this Court to enjoin the merger at issue pending resolution of the FTC’s appeal to the Ninth Circuit Court of Appeals. The motion is denied," the judge said in the order late on Thursday.

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The FTC had said it was seeking a preliminary injunction to temporarily stop the deal until an internal FTC judge could assess it. But Corley applied the standard needed to permanently stop the deal instead, which the agency argued was inappropriate.

The FTC had also said the judge erred in assessing the deal's effect on multi-game subscriptions and in how much credit she gave Microsoft for striking deals with rivals in order to save the proposed transaction.

To address the agency's concerns, Microsoft had agreed to license "Call of Duty" to rivals, including a 10-year contract with Nintendo contingent on the merger closing.

The deal, the largest in the history of the video game industry, was also struggling in Britain until this week. After the ruling in California, Britain's Competition and Markets Authority, which had opposed the transaction, said a restructured deal between Microsoft and Activision Blizzard could satisfy its concerns, subject to a new investigation.

It is rare for a merger fight to go to an appeals court. That said, the FTC appealed a ruling more than 10 years ago when it lost its fight against Whole Foods' purchase of Wild Oats. The agency settled with the companies before the appeals court made a decision.

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