UPDATE 1-UK competition watchdog investigates Sainsbury-Asda deal

(Adds details on investigation, background)

Aug 23 (Reuters) - Britain's competition regulator is starting a formal investigation into the proposed 7.3 billion pound ($9.31 billion) deal to combine supermarket chains Sainsbury and Walmart's Asda.

The Competition and Markets Authority said it will begin the first phase of detailed assessment into how the deal could affect competition for British shoppers.

The investigation will look at whether the deal could lead to less choice, and therefore higher prices or worse quality services, across products sold by both companies, the regulator said.

The cash and shares deal would see Sainsbury's combine with Asda to overtake Tesco as Britain's biggest supermarket group.

The investigation would also look at whether the merged company could use its increased buying power to squeeze suppliers and whether this could have an effect on shoppers.

The combined group is seeking savings of at least 500 million pounds, 350 million pounds of which would come from savings when buying from suppliers.

The CMA's remit is to ascertain whether merger situations could result in a substantial lessening of competition. It is independent of government when making decisions on mergers.

($1 = 0.7841 pounds) (Reporting by Sangameswaran S in Bengaluru Editing by David Goodman and Edmund Blair)