There has been City speculation that grocery market leader Tesco could be eyeing a bid for rival Morrisons.

Both retailers’ shares rose yesterday as gossip swirled in the Square Mile about a potential deal, the Daily Mail reported.

Private equity giant Permira was also said to be interested in acquiring Bradford-based Morrisons.

An offer could value Morrisons at £6.42bn.

City sources pointed to the fact that Morrisons chief executive David Potts is a former Tesco director, as is chairman Andrew Higginson, and said that would help ensure a smooth integration.

A deal could be seen as a distraction for Tesco, which is in the midst of a turnaround led by chief executive Dave Lewis.

There would also likely be competition concerns but the Daily Mail reported that Tesco “has apparently been given the all-clear by lawyers to proceed with a major acquisition”.

The speculation came amid ongoing turmoil in grocery as discounters Aldi and Lidl grow.

Later today Asda will post fourth-quarter figures, which are expected to reflect continued tough trading conditions.