Drinks giant Diageo is set to join the battle for rival Allied Domecq and could buy more than £2 billion (€2.97 billion) of brands in an Allied break-up without encountering regulatory problems, a source said yesterday.

Diageo is talking to a number of potential partners over a bid for Allied as two rival bidding consortiums struggle to win control and then split up the British-based maker of Ballantine's whisky, Beefeater gin and Sauza tequila.

Diageo, the world's biggest spirits group and maker of Smirnoff vodka and Johnnie Walker whisky, is talking to both bidder groupings and is also in contact with the only other big spirits group not officially involved in the bidding war, privately owned Bacardi.

The sources said Diageo was interested in joining up with Bacardi to form a bid but had not ruled out joining one of the two rival factions led by France's Pernod Ricard and the world's top wine group Constellation Brands.

"The best outcome for Diageo would be to walk away with the best plums from Allied. At least Diageo will want to make its competitors pay more," said the source.

With most big spirits players, apart from Diageo and Allied, controlled by family interests, Allied is viewed as the last big buying opportunity in a global drinks industry looking to catch up with runaway market leader Diageo.

The battle for Allied broke out earlier this month when Pernod and its US partner Fortune Brands made a largely cash bid, but then the Constellation consortium including Brown Forman said it too was seeking to make a bid.