Arcadia brands

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But in a statement, Arcadia said it believed "the prospect of Baugur being able to make a fully financed offer for the Company within an acceptable timetable is limited."

"The Board believes that Arcadia is well placed to create further shareholder value as an independent company."

Arcadia added that its current trading remained strong, and that it was on track to deliver profits of at least �52m for the six months to 23 February.

No hostile bid

Baugur has no plans to launch a hostile bid following the collapse of the talks the Reuters news agency reported, citing sources close to the Icelandic retailer.

Bonus is one of the chains operated by Baugur

It was a condition of the talks that Baugur would not start a hostile bid.

Earlier on Friday the Times newspaper had reported that Baugur was close to securing the necessary financing for the takeover bid.

It said the Royal Bank of Scotland was in the final stages of putting together a loan of between �500m and �600m.

Baugur dominates retailing in Iceland, holding about 45% of the country's supermarket sales as well as operating sports shops and pharmacies.

It has strong links with Arcadia. As well as being the largest shareholder in the company, holding 20% of its shares, it also runs Arcadia franchises in Scandinavia.

The original approach indicated Baugur was offering a price of about 280-300p per share.

Shares in Arcadia settled 4.1% lower at 257p, off earlier lows of 230p.