The Competition and Markets Authority (CMA) said findings of its so-called phase one inquiry into the deal found potential competition issues for stores in 463 local areas.
It raised concerns over 225 Sainsbury’s stores and 238 Asda stores.
The revelation, which emerged yesterday, raises the prospect of potential widespread store sell-offs in order to see the CMA give the deal the green light.
The CMA last week launched the second stage of its investigation into the merger, which will create a supermarket titan bigger than Tesco, with revenues of £51 billion and a network of 2,800 Sainsbury’s, Asda and Argos stores.
In findings of its initial inquiry and decision to refer the deal to a Phase Two probe, The CMA said: “At a local level, the parties’ stores overlap in several hundred local areas across the UK.
“The CMA believes that the merger may give rise to a realistic prospect of an SLC (substantial lessening of competition) in many of these local areas if Sainsbury’s and Asda are insufficiently constrained by other local competitors.”
The CMA’s in-depth investigation will consider whether the tie-up could lead to less choice, higher prices or worse quality services.
It will also look at other issues raised so far, including those relating to fuel, general merchandise such as clothing, and whether the merged company could use its increased buying power to squeeze suppliers.
A spokesman for Sainsbury’s and Asda said: “We welcome the start of the Phase 2 process.
“The grocery market has changed significantly in the last decade and is more competitive than ever, with the rise of discount formats, online grocery and food delivery businesses.
“We look forward to working with the CMA on the Phase 2 inquiry, where we expect it to conduct a full review of the market and take these changed market dynamics into consideration.
“Customers will be the big winners from this combination.
“By bringing the two businesses together, we will be able to invest further in more convenient ways of shopping while lowering prices and reducing the cost of living for millions of UK households.”
Asda, which is owned by US giant Walmart, and Sainsbury’s have gone on record saying suppliers will bear the brunt of a pledge to bring down the price of everyday products following their merger.
The duo have pledged price cuts of around 10 per cent on everyday items, although it is not yet known where the price reductions will fall.
The CMA has already raised concerns over their store overlap, saying last week shoppers could face “higher prices or a worse quality of service” in these local areas.