Sainsbury’s and Asda are in shock talks over a £10bn merger to create a grocery retail powerhouse.

Britain’s second and third-largest supermarket operators are thought to be in advanced discussions over the mammoth tie-up, which would create a business with a grocery market share of around 26%.

It would edge out the current share of grocery market leader Tesco, although that does not take into account the impact of its £3.7bn acquisition of wholesale titan Booker earlier this year.

The potential deal, first reported by Sky News, comes as grocery operators react to rapidly changing market dynamics.

Just last week, the Co-op was given the green light by the Competition and Markets Authority (CMA) to press ahead with its £137.5m purchase of symbol group Nisa.

It is not yet known how the potential Sainsbury’s Asda deal would be structured, or how the CMA would view such a move.

Former Asda boss Andy Clarke told Retail Week last November that the CMA’s ruling on Tesco-Booker had declared “open season” on grocery M&A activity – and raised the prospect of the big four becoming three.

Such consolidation had been unthinkable prior to the Tesco-Booker deal.

Should the merger go ahead, it would represent the biggest shake-up in UK grocery since Morrisons – the final member of the big four – bought Safeway back in 2004.

A Sainsbury’s spokeswoman said: “Sainsbury’s confirms that it and Walmart Inc are in advanced discussions regarding a combination of the Sainsbury’s and Asda businesses.”

A further announcement is expected on Monday, when Sainsbury’s will also hold a press conference and analysts’ presentation.