The UK Department of Trade and Industry today struck a blow to Whitbread's battle for Allied Domecq's pubs by referring its bid to the Competition Commission.

Trade and Industry Secretary, Mr Stephen Byers, said he considered the proposed £2.85 billion deal raised competition concerns for the British brewing and pubs sector.

The Commission will make its report by October 27.

Mr Byers made his decision following advice from the Office of Fair Trading.

Whitbread had previously said it did not foresee any major regulatory problems with its deal.

Its chief executive, Mr David Thomas, had said he was confident the deal would go through subject to the sale of fewer than 200 pubs.

In a statement, the DTI said: "The decision to make the reference does not in any way prejudge the question of whether or not the proposed merger would be against the public interest."

Its shares fell 4 per cent - or 36p - to 929p after the news, while Allied's shares lost 17 1/2p to 575 1/2p.

The move will come as a fillip for Punch Taverns, which has countered Whitbread's latest deal with a £2.925 billion offer.

Allied has said it prefers the Whitbread offer because it would be completed faster than Punch's. Punch, whose bid also has to be examined by the OFT, pitched its latest offer last Monday, but Allied still said it favoured the lower Whitbread deal.

The Allied board said it would put both bids to its shareholders at a meeting next Friday if Punch made its offer formal by midnight today.

Observers said Allied now had to review the whole issue of what proposals to put to shareholders at next Friday's meeting.

One analyst said Allied might even decide not to have a meeting at all.