* Sainsbury's agreed 7.3 bln stg takeover of Asda in April
* Formal inquiry follows 4 months of information gathering
* Sainsbury's/Asda want "fast-track" to Phase 2 inquiry
* Sainsbury's/Asda confident of regulator's green light
* Analysts say CMA could insist on store disposals (Adds detail, CMA CEO, analyst comment, updates shares)
Aug 23 (Reuters) - Britain's competition regulator on Thursday launched a formal investigation into supermarket group Sainsbury's proposed 7.3 billion pounds ($9.3 billion) takeover of smaller rival Asda, the UK arm of Walmart.
The move by Sainsbury's, Britain's second-largest supermarket player, for third-placed Asda, would see the merged company overtake current market leader Tesco and be better placed to fend off fast growing German discounters Aldi and Lidl as well as online giant Amazon.
Since the UK grocery sector's biggest deal in 15 years was announced in April the Competition and Markets Authority (CMA) has been gathering information needed to start a formal probe.
"Its vital to find out if the millions of people who shop in supermarkets could lose out as a result of this deal," said Andrea Coscelli, CMA chief executive.
"We...will not allow it to go ahead unless any concerns we find are fully dealt with."
The CMA, which is independent of government, will now begin the first phase of a detailed assessment into how the deal could affect competition for British shoppers in the 190 billion pound food and grocery market.
"The CMAs investigation will consider whether the deal could lead to less choice, and therefore higher prices or worse quality services, across the range of products sold by both businesses," it said, noting that as well as being major retailers of groceries, both in-store and online, Sainsburys and Asda also compete in fuel, electricals, toys and clothing.
The regulator will also examine whether Sainsbury's-Asda could use its increased buyer power to squeeze suppliers and whether this could have knock-on effects for shoppers - for example, through suppliers being less able to innovate or having to charge higher prices to competitors of the merged group.
The combined group is seeking 350 million pounds of savings when buying from suppliers.
The CMA invited views by Aug. 31 on how the merger could affect competition.
Sainsburys and Asda have asked the regulator to move quickly to an in-depth Phase 2 inquiry through its "fast-track" process. The CMA said it expected to accept this request.
Phase 2 typically lasts 24 weeks, with the possibility of an eight week extension.
Competition lawyers have said Sainsbury's and Asda face an uphill battle to get the deal passed without having to sell off so many stores that its rationale is removed.
Encouraged by last year's surprise decision by the CMA to unconditionally clear Tesco's near 4 billion pounds purchase of wholesaler Booker, Sainsbury's and Asda have expressed confidence the regulator will not insist on mass store disposals but have not said how many would make the deal unattractive.
Analysts at UBS have a base case scenario of a modest 28-54 store disposals to satisfy the regulator. However, that number rises to 132-161 stores if the CMA excludes discounters such as Aldi and Lidl as competitors.
A source with knowledge of Sainsbury's and Asda's thinking, told Reuters store disposals that run "into the hundreds" would likely kill their deal.
If approved, Sainsbury's and Asda aim to complete the deal in the second half of 2019.
Shares in Sainsbury's, up 41 percent so far this year, were down 0.5 percent at 1311 GMT.
($1 = 0.7841 pounds) (Reporting by Sangameswaran S and Arathy S Nair in Bengaluru and James Davey in London Editing by Edmund Blair and Elaine Hardcastle)