Morrisons’ interest in buying Iceland Foods in a £1.5bn bid is fading as the deadline for second round bids approaches.

Morrisons is one of the parties interested in buying the frozen food retailer but its interest is cooling ahead of the January 31 deadline according to people close to the auction process, the Financial Times reported.

Morrisons, which is keen to build up its convenience arm, is said to be concerned over the size of the 750-store retailer and may yet acquire stores from the eventual owner.

Last week, Asda reportedly abandoned plans to bid for the whole of Iceland but instead plans to join forces with private equity firms BC Partners and Bain Capital to handpick which stores to take on.

Asda had been in talks to go-ahead with a joint bid for Iceland with Scottish supermarket chain Farmfoods to circumnavigate competition hurdles.

Morrisons and Asda pulling out of the process would increase pressure on the banks – Landsbanki and Glitnir, which own 77% of the retailer - to put £200m of junior debt into any bid above £1.4bn.

Founder and chief executive Malcolm Walker appears to be in pole position to take on the retailer with BC Partners and Bain Capital also still in the process.

Iceland is forecast to make £235m of profits for the year ending March 2012 and £245m the following year.