Asda has described reports that it is preparing to take over Safeway as "market speculation".
Safeway said: "In the light of press speculation, the board of Safeway wishes to clarify that it has had no approaches from, and is not in discussions with, any third party regarding a possible offer for the company".
The Office of Fair Trading said it would expect any takeover bid by Asda to be referred to EC Competition Commissioner Mario Monti because of its size.
Such a deal - said to be worth around £2.8 billion sterling - would signal a challenge to Britain's biggest supermarket chain, Tesco.
Asda is part of the world's biggest retailer, US-based Wal-Mart. It is is the third-biggest supermarket chain in Britain in terms of sales, after Tesco and Sainsbury.
Asked to respond to the takeover reports, a spokesman said: "It is market speculation, and we don't comment on market speculation".
Safeway shares rose by 5 per cent following the reports, up 10.5p to 216.5p.