Dairy industry sources have called on the OFT to give the go-ahead to the proposed merger of First Milk and Milk Link.

Opponents of the merger have argued that although the combined co-op would control less than 25% of Britain's raw milk supply, it would dominate own label cheese sales to UK retailers.

However, supporters said the cheese market was at least Europe-wide and urged the competition watchdog not to apply a narrow UK-only view of the market.

While the two co-ops produced about 100,000 tonnes of cheese per year for retailers making them large in UK-terms, they were tiny in global terms, representing 1.5% of EU and less than 1% of global production, they pointed out. Competitors expressed confidence that the OFT would not refer the merger to the Competition Commission, though one said he suspected the retailers would want a "chat" with the OFT about prices.

First Milk was equally optimistic. "We don't think there will be an issue," said Paul Flanagan, group communications director at First Milk. "We are operating in a world market where we face powerful competition from major international players."

The OFT has already indicated it favours a similar definition of the market in its reports on Milk Link's acquisition of Glanbia in 2004 and First Milk's acquisition of Dairy Crest's cheese business last year. "In terms of the appropriate geographic scope, the OFT considers the supply of cheese to be at least EU-wide, if not global," it concluded.

John Fingleton, OFT chief executive, told Dairy UK last year that the same principle applied to dairy ingredients.

There is also considerable UK capacity that could be used to produce own label cheese, said John Allen of Kite Consulting. "In a year's time there will be as much 'new' cheese-making capacity in the UK as that represented by the merged business," he said. "Competition should still be intense."