AT&T CEO Randall Stephenson appeared on cable television early on Wednesday to tout his $39 billion deal to buy T-Mobile USA and how it could bring back 5,000 jobs to the United States from overseas once done.

But just hours later, the proposed acquisition appeared to be hanging by a thread after U.S. antitrust enforcers at the Justice Department filed a surprise lawsuit to block the deal that would combine the No. 2 and No. 4 U.S. wireless carriers.

The 22-page lawsuit -- filed because the government said the deal would harm competition and consumers -- caught much of vacationing Washington off guard and sent executives from the carriers scrambling to figure out how things broke down.

The two sides were talking past each other, said one source familiar with the case, adding that the Justice Department felt nothing was really presented to address concerns about competition.

The decision to challenge the deal came just five months after it was announced in March. Typically, antitrust reviews of large transactions can take a year or more.

This one took everybody by surprise, said a person close to one of the carriers, adding they thought the Justice Department would ask for concessions, but not derail the deal.

Less than 24 hours ago, representatives from AT&T Inc and Deutsche Telekom AG's T-Mobile USA sat down with Justice Department officials to continue wide-ranging talks about the transaction.

AT&T -- whose high-powered lobbying team in Washington is led by Jim Cicconi, who previously worked in the Reagan and Bush administrations [ID:nN22165104] -- revealed the jobs announcement to the Justice Department at the meeting.

The Justice Department did not signal or alert the companies about the lawsuit during that meeting, according to one source familiar with the gathering.

The decision to file the lawsuit came after approval from U.S. Deputy Attorney General James Cole, said the source, who was familiar with the sequence of events. Attorney General Eric Holder is recused from the matter, his spokeswoman said without giving a reason.

The issue of jobs is paramount to the Obama administration as it tries to lower the unemployment rate stuck at just over 9 percent.

We see this as a move that will help protect jobs in the economy, not a move that's going to in any way reduce them, Cole said, noting that companies tend to cut jobs after completing mergers.

Earlier on Wednesday, Stephenson told business cable television network CNBC that AT&T would expand high-speed wireless to lesser served areas and bring 5,000 call center jobs back into the country once the deal was completed.

In fact the beauty of this transaction is we put these two businesses together and together we are going to be able to do what neither one could do by ourselves, Stephenson said.

Just a few hours later, AT&T officials were privately told about the lawsuit and antitrust attorneys filed the paperwork in federal court in Washington.

Just after 11 a.m. EDT, Justice Department officials stepped to the podium to make the announcement, sending AT&T and Deutsche Telekom shares tumbling, ending the day down 3.8 percent and 7.6 percent, respectively. The shares of No. 3 U.S. wireless carrier Sprint Nextel Corp jumped 5.9 percent.

We've been working on this for months ... it has been an exhaustive investigation and throughout that time we've been in constant dialogue with the parties, said Sharis Pozen, acting head of the Justice Department's antitrust division.

The source familiar with the case said the reason for the lawsuit was unrelated to jobs, but instead stemmed from concerns the combined company would hobble wireless competition, lead to higher prices for consumers and hurt innovation.

Cole said that, if the merger were to proceed, 90 percent of the U.S. wireless market would be concentrated among three providers.

During the numerous meetings since March, the companies and Justice Department officials had not begun talking about specific concessions that could ameliorate the competition concerns, the source close to the case said.

The DoJ and AT&T were just beginning the true back and forth of the review, said another source close to the deal.

What remains in question is whether AT&T was going to provide specific solutions to address the concerns the Justice Department raised repeatedly.

Despite the surprising timing of the announcement on Wednesday, the source close to the case said the lawsuit was a real attempt to halt a fundamentally flawed deal, not a tactic to wring big concessions from AT&T.

It remains to be seen whether the battle shifts entirely to federal court, or whether the carriers try to win over antitrust regulators in other ways.

The source close to one of the carriers said they may have to offer to divest up to 25 percent of the combined company's assets, up from an earlier estimate of as much as 10 percent.

We now view the probability of success at 35-40 percent, down from our previous 75 percent view, said Barclays analyst James Ratcliffe, adding that the DoJ tends to win in court 60 percent of the time.

(Additional reporting by Nadia Damouni in New York; editing by Tiffany Wu and Andre Grenon)

AT&T Lawsuit