Background: God had flooded the Earth, and repopulated the earth through Noah's sons--Ham, Shem, & Japheth. Ham had offended Noah, and so he cursed him & his offspring, and blessed Shem & Japheth. Abraham was born to Shem, and the Canaanites came through the line of Ham. Canaanites would eventually inhabit what would be the promised land. Descendants of all of them were gathered in Babel, intending to concentrate--rather than fulfill their role of re-populating the earth.
Main point summary
In this passage, God confused their language so they could not do "whatever they proposed to do." However, I believe it's deeper than that. The confusion of their language was mercy. Man, in its vain conceit was intending to equate his power with God's and concentrate in an area. Obviously, this action would never rival God's being, but ultimately would result in ruin of man. God used this frustration to humble man, and bring them back to the ground--so to speak.
Now the whole earth had one language and the same words.
And as people migrated from the east, they found a plain in z the land of Shinar and settled there.
And they said to one another, “Come, let us make bricks, and burn them thoroughly.” And they had brick for stone, a and bitumen for mortar.
Then they said, “Come, let us build ourselves a city and a tower b with its top in the heavens, and let us make a name for ourselves, lest we be dispersed over the face of the whole earth.”
And c the Lord came down to see the city and the tower, which the children of man had built.
And the Lord said, “Behold, they are one people, and they have all one language, and this is only the beginning of what they will do. And nothing that they propose to do will now be impossible for them.
Come, d let us go down and there confuse their language, so that they may not understand one another’s speech.”
So e the Lord dispersed them from there over the face of all the earth, and they left off building the city.
Therefore its name was called f Babel, because there the Lord confused 1 the language of all the earth. And from there the Lord dispersed them over the face of all the earth.
Man, in its vanity thought its own works and creation could merit equality with God. They thought it they could reach heaven, they would control their own destinies.
God, rather than destroy humanity (again), punished through mercy--choosing to confuse and scatter them, rather than destroy. God's recognition of their ability was not recognizing their "power," but their ability to result in their own ruin. God was not afraid of their accomplishments, but concerned for the extent of their pride This humbling consequence was an action of mercy.