Malcolm Walker, founder of the frozen food chain Iceland, is thought to have ended his interest in buying Woolworths, and is instead deciding whether to buy up chunks of his group owned by Baugur.
Mr Walker is believed to have withdrawn his £50m offer, rejected by Woolies chairman Richard North in August, although he hasn't ruled out picking up assets from the retailer if it falls into administration.
One City insider said: "Woolworths is pretty much off. It's not been totally scrapped but it's very much on the backburner."
Talks between Mr North and Mr Walker are thought to have ended two weeks ago, with no plans for additional meetings agreed.
Instead, Mr Walker is set to concentrate on buying up some of Baugur's stake inthe Iceland food group he runs following the turmoil in the investment company's domestic Icelandic market, which has seen three banks nationalised.
Mr Walker follows BHS-owner Sir Philip Green, who is this weekend in talks with the Icelandic government to buy up the debt held by Baugur in the collapsed banks, thought to be as much as £1.5bn.
In the wake of the developments last week, Baugur issued a statement "to make it clear that it will have no impact on Baugur's operations and its portfolio companies".
Sources close to Baugur said that while the group wasn't actively looking to sell stakes in any of its portfolio companies, the recent sale of its Julian Graves health food chain to Holland & Barratt showed it wasn't averse to doing deals at the right price.
Earlier in the week Mr Walker took the surprise step of writing to his suppliers to reassure them that the crisis in the country of Iceland would not have an averse effect on his business. None of the UK's three main credit insurers – Euler Hermes, Atradius and Coface – have yet pulled cover for companies supplying Iceland. Mr Walker claimed in the letter that the group has £180m of cash on deposit in several UK banks.
Last Friday, meanwhile, it was revealed that Sir Alan Sugar, star of 'The Apprentice' and founder of the Amstrad group, had taken a near 4 per cent stake in Woolworths, sending its shares up by 18 per cent to 3.7p. Shares in Woolworths have collapsed over the past year, falling from a high of more than 22.5p. The company now has a stock market capitalisation of just £52m.
Steve Johnson, the former Focus DIY group chief, took over as chief executive of Woolworths in September. One analyst said: "Sugar is taking a punt on this. If he does lose his stake, it really won't the end of the world given the money he's paid for it. You never know, he could clean up if Johnson turns it around."
Weeks before taking the helm Mr Johnson revealed to the City that the retailer had lost around £100m in the first half of the year, though a recent presentation to investors is thought to have been well received. Mr Johnson has secured the backing of his biggest shareholder, Ardeshir Naghshineh, who owns a 10 per cent stake in the company.