The governor of Indonesia's central bank stopped short of approving the DBS bid for a controlling stake in Jakarta-based Bank Danamon.
Instead, a maximum 40 per cent stake will be permitted, in keeping with the country's revised banking regulations.
Bank Indonesia (BI) governor Darmin Nasution ruled that the approval for a stake of up to 67 per cent will depend on the Monetary Authority of Singapore's (MAS) decision to allow three Indonesian state-controlled banks greater access in Singapore.
Observers say that Dr Darmin is not leaving the decision to his successor, but is putting pressure on the MAS.
The latest outcome is a bid by Indonesia to pressure Singapore and DBS, its largest lender.
In his last presentation to a parliamentary finance commission on Tuesday, the BI chief did not rule out further approvals, saying: "We will agree with the 67 per cent if there is a commitment, in writing, to allow three state-controlled banks (to open branches and expand) in Singapore."
But Dr Darmin, who will officially hand over the reins to former finance minister Agus Martowardojo on Thursday, stood firm on demanding a reciprocity agreement on the banking industry between Indonesia and Singapore.
This was backed by growing calls from Indonesian politicians for Singapore to open up to Indonesian banks if the DBS deal is allowed to go through.
The deal is being monitored by other foreign lenders who say that the outcome will determine how open Indonesia is to more foreign ownership of banks and whether they should follow suit.
At least three banking deals in Indonesia worth US$3.2 billion (S$4 billion) are being held back due to regulatory uncertainty.
In April last year, DBS placed a record US$7.2 billion bid for Danamon, seeking a stake of up to 99 per cent.
This included the equivalent of 45.2 trillion rupiah (S$5.8 billion) to be paid to Singapore's investment company, Temasek Holdings, for its 67.4 per cent stake.
But the offer hit a snag when Indonesia issued a ruling last year, capping ownership by foreigners at a 40 per cent stake in a local bank.
The remaining shares above 40 per cent would be subject to scrutiny by BI on the soundness and performance of the banking unit and its parent company over at least 18 months.
An MAS spokesman said that it welcomed BI's approval for DBS Holdings to acquire up to a 40 per cent stake in Danamon.
"Given the good cooperation between Singapore and Indonesia, MAS and BI are exploring further access into each other's markets. In the case of Indonesian banks in Singapore, this will be by way of a broader provision of financial services, both in wholesale banking and to, for example, Indonesian students and work permit holders in Singapore," the spokesman said.
While a DBS spokesman said it has yet to be officially notified, it expressed hope that the original planned acquisition will be approved.
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