The government said on Friday that it had blocked takeover offers from Morrisons' three bigger rivals - Tesco, Asda and J Sainsbury - on competition grounds.

The decision follows a five-month investigation into the likely impact of a Safeway buyout on food prices and consumer choice by the Competition Commission.

Trade & Industry Secretary Patricia Hewitt said she agreed with the competition watchdog's view that a takeover of Safeway by any of the 'Big Three' retailers would "operate against the public interest at both a local and national level".

The decision was widely anticipated, with most experts saying that Morrisons' bid raised fewer competition issues because of the firm's smaller size and regional concentration in the north of England.

Disposals

However, Ms Hewitt said Morrisons would have to sell off 53 of Safeway's 479-strong chain of supermarkets if its takeover attempt was successful.

SAFEWAY SLUMP With an end to the bidding war in sight, Safeway's share price fell sharply Check out the latest share prices in the UK food retail sector

Tesco, Sainsbury and Asda have been given permission to bid for those stores subject to further conditions which have yet to be spelled out.

Analysts said Morrisons could pick up a cash windfall if the surplus stores become subject to a bidding war between the Big Three.

"This looks good for Morrison," said Alastair Gorrie, competition partner at law firm Coudert Brothers.

"Competing bids could enable them to defray some of their acquisition costs."

Morrisons, whose original �2.9bn ($4.6bn) all-share offer has now lapsed, is expected to come forward with a fresh bid in the coming weeks.

More buyers?

Morrisons' new offer may be pitched at a lower level given Safeway's lacklustre trading performance since the start of the year.

The Bradford-based retailer's own performance, in contrast, has been stellar, with half-year profits jumping 10% to �126m.

But the company may yet have to fight off a rival offer from retail entrepreneur Philip Green, who was exempted from the competition inquiry because he has no interests in the grocery sector.

Sainsbury's, which has been steadily losing popularity with the nation's shoppers, has perhaps the most to lose from the ruling What now for Safeway suitors?

And there has been speculation that a consortium led by Safeway's management team may also weigh in with a bid.

In the City, Safeway shares closed 7% lower at 276 pence while Morrisons was down 4% at 212p.

Morrisons chairman Sir Ken Morrison said: "Our strong belief is that Morrisons is the best owner of Safeway.

"Merging with Safeway will allow Morrisons to accelerate the roll-out of its successful and popular retail format across the UK, providing consumers with a distinctive offering and unlocking the benefits of scale for shareholders."

Consumer groups said the prospect of a Morrisons-Safeway tie-up was "good news for shoppers".

Phil Evans, principal policy adviser at the Consumers' Association, said: "We continue to believe that the best option for Britain's consumers lies in a strengthened fourth player boosted by national coverage and aggressive price competition."

Epic contest

The race to buy Safeway, the UK's fourth-biggest food retailer, has been one of the most high-profile and bitterly fought takeover battles of recent years.

All the major supermarket chains, pressured by intense competition and prevented from expanding organically by strict planning regulations, were keen to get their hands on Safeway's network of stores.

But fifth-ranked Morrisons, which stands to acquire the size and scale needed to compete at the top of the supermarket league, has more to gain than any of its rivals.

A Morrisons takeover of Safeway would propel it up the rankings to fourth position in terms of market share, just behind Sainsbury, and within striking distance of second-ranked Asda.

It is the prospect of creating a fourth force in the grocery sector capable of competing with the industry leaders that appears to have swung the competition authorities' decision.