The Competition and Market Authority (CMA) has told bookmakers Ladbrokes and Gala Coral that they might have to sell up to 400 of their combined shops if their proposed £2.2bn merger is to go ahead.

Last year, the two rivals agreed a deal to create Britain's biggest bookmaker before the competition watchdog launched an inquiry into the proposed merger after an initial probe raised concerns that such a deal could lead to "substantial lessening of competition".

The groups, who together own a combined 4,004 venues in Britain, 2,154 of which are owned by Ladbrokes, have defended the proposed deal by saying that the merger would allow them to save £65m a year and would lead to a faster online expansion.

However, in a statement released on Friday (20 May 2016), the regulator said it has identified 659 areas where the deal could have a negative impact on competition.

"We've provisionally found that the merger between two of the largest bookmakers in the country may be expected to reduce competition and choice for customers in a large number of local areas," said Martin Cave, chair of the inquiry at the CMA.

"Although online betting has grown substantially in recent years, the evidence we've seen confirms that a large number of customers still choose to bet in shops – and many would continue to do so after the merger."

The proposed deal could damage high-street customers, the report added, indicating that consumers could be affected by a decline of of competition and choice in their local area.

"Discounts and offers of free bets to individual customers are ways betting shops respond to local competition which could be threatened by the merger," he said. "We're also concerned that such a widespread potential reduction in competition at the local level could worsen those elements that are set nationally such as odds and betting limits."