Germany is under pressure from the EU to open up its gambling market, which is controlled by the country's 16 states. Online gambling is banned, except for betting on horse racing.
But betting companies from other EU countries complained that the proposed new rules would severely hamper their activities or shut them out of the market.
Following a three-month consultation, the European Commission said on Tuesday that the law, which Germany wants to adopt in January, must take account of factors such as judgements by the European Court of Justice last September.
The statement raised hopes that Germany may have to alter its plans, lifting shares in BwinParty and Betfair by 5.5% and 2.6% respectively by 13:29 GMT.
UBS analyst Simon Whittington said the closure of the German market to online gambling companies was now looking more unlikely.
"In our view, this helps decrease the likelihood of a full closure of the German market. We believe operators will continue to trade in Germany if there is any legal uncertainty and the [Commission's] announcement is clearly supportive for operators' arguments," he said.
The Luxembourg-based ECJ ruled last year that while monopolies were sometimes justified, Germany's public monopoly on sporting bets and lotteries did not advance the objective of combating the dangers of gambling in a consistent and systematic manner.
British betting exchange Betfair, which complained to the Commission about Germany's proposals for a 17% licensing tax on turnover and to exclude private operators from offering casino and poker bets, said it was not alone in having those concerns.
"Aside from the opinion of the Commission, the British and Maltese governments have also submitted comments to the European Commission that raise serious doubts about the legality of the draft treaty," Betfair said.
"We now expect the proposals to be amended so that they genuinely cater for a competitive, well-regulated online gambling market in Germany," Betfair's chief legal officer Martin Cruddace said.
A spokesman for the EU executive said Germany had until 18 August to respond.
The European Gaming and Betting Association (EGBA) lobbying group said the German proposals, if not revised, could shut out competition.
"These provisions effectively slam the door in the face of EU operators from other member states and will in fact extend the monopoly for offline to online games," EGBA Secretary-General Sigrid Ligné said.
EurActiv with Reuters