Merchant Equity Partners, which bought MFI for a nominal £1 in 2006, is said to be exploring potential combinations for the business, as well as the possibility of attracting further investment.

The Sunday Times said MFI was looking at a merger with its British rival Homeform, which owns brands Moben, Kitchens Direct, Sharps and Dolphin. Manchester-based Homeform has 160 showrooms across the UK with more than 1,300 employees and 1,500 self employed fitters and designers.

Talks are also said to have taken place with Nobia, the Swedish retailer, about combining its UK business Magnet Kitchens with MFI. Discussions have also been held with several private equity firms and hedge funds about an additional injection of cash.

A spokesman for Merchant told the newspaper that it had been happy with operational progress since the 2006 deal, but that recent market conditions had prompted it to consider its strategic options and "possible business combinations".

MFI - one of the UK's best known retail brands - has been the subject of frequent speculation about its future. However, sources told the newspaper that the retailer will survive and that its original backers will continue to provide support.

A tie-up with Homeform, which is owned by private equity firm Sun European, would create a combined company with around 360 stores and employing more than 5,000 people.

MFI established itself as a major player in home furnishing shortly after it was founded in 1964 by Noel Lister and Donald Searle, who called it Mulland Furniture Industries after Searle's wife's maiden name.

It started out as a mail order business but three years later opened its first shop in Balham, south London.

Over the next 30 years it became the biggest furniture retailer in the UK with a value of £1 billion. But its position as market leader was hit by the growth of stores such as Ikea, B&Q and Homebase, causing sales to fall from £854 million in 2003 to £742 million in 2005.

It also suffered problems with its supply chain, with customers becoming increasingly fed up with delays and errors to orders, which damaged confidence in the brand.