Britain's competition watchdog rejected accusations that Tesco could use its land bank to control nearly half of national grocery retailing but warned of a "climate of fear" in the sector.
In its first comments from an investigation into the £125 billion grocery market, the Competition Commission said there was little sign that grocery suppliers, as a group, were suffering a decline in profits.
It also signalled that predatory pricing was sometimes acceptable.
But it said it still had more work to do and that it would not tolerate a company abusing a dominant market position.
"We are not here to punish success or individual retailers, but we are concerned with whether Tesco, or any other supermarket, can get into such a strong position, either nationally or locally, that no other retailer can compete effectively," commission chairman Peter Freeman said.
The commission said it would deliver its final conclusions in June.
Its investigation is the third into the supermarket sector in the past six years, and it comes after a surge in market share by Tesco, which now accounts for almost one pound in every three spent in supermarkets.
It is almost twice the size of Asda, owned by Wal-Mart Stores, and Sainsbury.