Philip Green's bid for Arcadia, the Top Shop to Burton clothing group, has been questioned following news that one of its biggest shareholders has been investigated by police.

The retail entrepreneur has made a "take it or leave it" offer of �850m ($1.3bn) for the group.

But a key part of the deal was a plan to sell three brands to Icelandic group Baugur, which owns 20% of Arcadia shares.

Now it has emerged that Baugur was raided by the Iceland police force's economic crimes department as part of an investigation into claims of illegal gains by directors.

Will there be a bid on the table?

Mr Green, who made a fortune after turning around the once struggling retailer BHS, is offering 408 pence per share - or �770m - for Arcadia.

Arcadia brands

Dorothy Perkins Burton Evans Wallis Top Shop Top Man Miss Selfridge

Even before news of the Baugur investigation, some analysts questioned whether the offer should be nearer to 500p before Arcadia recommends it to shareholders.

Peter Jones, retail analyst at Peel Hunt, said news of the Baugur allegations gave the clothing group more time to negotiate.

"The issue now is whether there is going to be a bid on the table," he said.

Arcadia wants clarification

The Icelandic retailer is being questioned over claims that its management, including chairman Jon Asgeir Johannesson and chief executive Tryggvi Jonsson, received "unlawful gains" from a US wholesaling company.

Baugur said these claims were without foundation and Mr Green said the investigation was "news to me".

Shares in Arcadia continued to rise in early trade, up 1.25p to 371.25p. They have jumped over 100p since news of Mr Green's approach gathered pace a month ago.

Arcadia said it could not judge Mr Green's bid until the situation had been clarified.