Bid speculation has sent shares in the UK supermarket chain Safeway higher.

The stock rose more than 7% to 221 pence after a report that its competitor Asda was preparing a �2.8bn ($4.4bn) bid.

Safeway has been seen as a likely takeover target for several months as its inability to compete with major competitors such as Tesco, Sainsbury's and Asda has sent its shares 33% lower in six months.

"When a share price is as depressed as Safeway's, rumours tend to be a daily occurrence," said one analyst.

"We are of the opinion that there are many more reasons for a bid not to happen, than to happen."

Not allowed

But the regulators would intervene and stop a deal between the two UK supermarkets, many analysts predicted.

"I'm sure Safeway would love to be put out of their misery and in an ideal world Asda would love to take them over but I'm also sure the government wouldn't allow it," said another analyst.

"Asda is the best performing supermarket in the UK, it hasn't a chance of arguing that it needs to buy Safeway to be able to compete with Tesco."

However Asda was reported to have already discussed a possible deal with Office of Fair Trading officials.

Asda is already the third largest supermarket in the UK and it is owned by the world's biggest retail group Wal-Mart.

Job losses

A proposed deal between Safeway and Asda might prove unpopular with workers and regulators.

Job losses would be inevitable since it would lead to the closure of shops in areas where the two supermarket majors overlap.

The government would be loath to allow it to happen in the wake of its "rip-off Britain" campaign, where supermarkets faced a barrage of criticism for their high prices.

The Competition Commission did however clear the industry of anti-competitive behaviour two and a half years ago.