JJB Sports has threatened legal action against rival Mike Ashley, founder of Sports Direct, in an escalation of the row over a £1.5m loan to JJB chairman Sir David Jones.

Law firm Herbert Smith, acting for JJB Sports, has written to Ashley alleging defamation and demanding a retraction and apology for comments made about the loan.

It is also understood that Ashley’s lawyers, Mishcon de Reya, have written to JJB threatening to report the retailer to the Financial Services Authority over a statement made earlier this week, The Daily Telegraph reported.

The controversy now centres around the timing of the loan. JJB has said it was “initiated” before Jones joined the business as a non-executive director in October 2007. Ashley has claimed Jones approached him for the cash after starting at JJB.

The revelation of the loan raised concerns about a potential conflict of interest on Jones’s part.