WOOLWORTHS has rejected a merger with fellow high street retailer Bhs.

The group said it had held exploratory discussions with Bhs boss Philip Green, to examine the benefits of a closer relationship between the pair, including the possibility of a merger.

However, Woolworths said: "After due consideration of the potential benefits of a merger, the board does not believe that such a merger, with its attendant risk and uncertainties, would be in the best interests of shareholders.

"Accordingly, Woolworths has terminated the discussions."

Shares in Woolworths had jumped six per cent ahead of the statement, as rumours swept the City that a takeover bid was imminent.

However, following the announcement, shares slid 11 per cent to 43p.

By the close of trading they had recovered to trade at 45p, down 2p.

Shares in the London group, best known for its CDs, toys and pick 'n' mix sweets, have suffered in the wake of a disappointing update last month showing it was continuing to struggle to revive sales.

Talks were initiated by Mr Green, who several weeks ago invited Woolworths' chairman Gerald Corbett, the former Railtrack chief, out to lunch. The talks rumbled on but eventually terminated on Thursday.

The discussions follow a tough time for Woolworths, which was demerged from B&Q-to-Comet group Kingfisher last year.

Earlier this year it reported full-year figures showing it had crashed into the red. A costly stock clearing programme and poor trading at Christmas hit the group in the months after the demerger.

But Mr Corbett said at the time the group was confident of delivering a recovery in profitability.

Woolworths' board said it believed the group's most important priority should be implementing its recovery plan.

The group said it was confident the plan would achieve a turnaround of the business and thereby deliver "substantial value to shareholders".

In a statement, it said: "Phase one has already been completed with the reduction of stock and debt inherited at the time of the demerger, the strengthening of the management team and implementation of operational improvements to the business.

"Phase two of the recovery plan is under way with management now focusing on profit recovery."