A planned merger of Sainsbury's and Asda has been thrown into jeopardy after the competition watchdog identified "extensive" concerns.
The Competition and Markets Authority (CMA) said the deal could lead to higher prices and lower quality and that it would be "difficult" for the companies to resolve them so that it can go ahead.
Its provisional findings effectively block the merger unless the plans are altered before a final report due at the end of April - and were described as "death by 1,000 cuts" by one person close to the tie-up.
:: Fury in the aisles over the merger that may never happen
The CMA said options for addressing its concerns included blocking the deal or forcing the companies to sell off "a significant number of stores and other assets" - potentially including one of the Sainsbury's or Asda brands.
It said: "The CMA's current view is that it is likely to be difficult for the companies to address the concerns it has identified."
The companies are understood to be considering the possibility of a judicial review.
Shares in Sainsbury's were 18.5% down by the close of trading in the UK while those in Asda's US parent firm, Walmart, were 3.4% down on Wall Street.
Key findings of the CMA's provisional report include:
:: The merger could lead to higher prices, a poorer shopping experience and reductions in range and quality for in-store and online shoppers
:: Prices could rise at 132 Sainsbury's and Asda petrol stations
:: The deal would reduce competition across the UK and in particular in 629 areas where the stores overlap
:: Options to remedy the concerns include blocking the deal or forcing the sell off of either the Sainsbury's or Asda brand
The two supermarkets - Britain's second and third biggest - issued a scathing response to the findings, saying that they "fundamentally misunderstand" how people shop and that the competition body had "moved the goalposts".
They continued to insist that cost savings from the deal would result in lower prices for customers.
The supermarkets announced plans for the £13bn tie-up last April, which would see the two businesses retain their separate brand names but create "efficiencies" that would slash costs.
It would create a grocery powerhouse to overtake Tesco as the number one player in the sector - meaning the deal was always destined to attract close scrutiny from competition authorities.
Stuart McIntosh, chairman of the group carrying out the CMA investigation, said: "These are two of the biggest supermarkets in the UK, with millions of people purchasing their products and services every day.
"We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK.
"We also have concerns that prices could rise at a large number of their petrol stations."
In a joint statement responding to the findings, the supermarkets said: "These findings fundamentally misunderstand how people shop in the UK today and the intensity of competition in the grocery market.
"The CMA has moved the goalposts and its analysis is inconsistent with comparable cases.
"Combining Sainsbury's and Asda would create significant cost savings, which would allow us to lower prices. Despite the savings being independently reviewed by two separate industry specialists, the CMA has chosen to discount them as benefits.
"We are surprised that the CMA would choose to reject the opportunity to put money directly into customers' pockets, particularly at this time of economic uncertainty.
"We will be working to understand the rationale behind these findings and will continue to press our case in the coming weeks."
The CMA is now inviting responses to its findings and will issue its final report by 30 April.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "The CMA has basically kicked the Sainsbury-Asda merger into touch.
"While the regulator left the door open for the supermarkets to sell off assets to complete the deal, it's clearly not keen on that solution.
"The supermarkets will now have to bend over backwards if they want to proceed with the merger, and even then, wouldn't be guaranteed a favourable ruling from the CMA."