The UK Department of Trade and Industry today [Friday] cleared the way for supermarket operator William Morrison to bid for fellow player Safeway.

The chain must sell just 53 stores as part of the deal.

The DTI refused to allow bids from four other potential candidates, deeming that Wal-Mart-owned Asda, Sainsbury’s and Tesco were already too dominant to allow fair competition.

Morrison started a multi-player race to buy Safeway by announcing an agreed bid of £2.9m (US$4.8m) early January.

The news leaves just two contenders for one of the few big prizes still up for grabs in the highly concentrated UK supermarket sector. As well as Morrison, clothing entrepreneur Philip Green is still said to be interested. His submission of interest was not referred to the DTI as he has no other food retail interests.

Reports have suggested that Morrison may dig deep to sweeten its bid. If Morrison’s offer is accepted, the company would enjoy a 20% share of British grocery sales, pretty much on a par with Asda and Sainsbury’s, although still behind Tesco.

Tesco, Asda and Sainsbury’s are likely to want to buy the 53 stores that must be divested, although Co-op has also said it would be interested in buying up stores.

Analysts have suggested that Asda might appeal the decision.