Shares in Woolworths rose sharply as investors awaited Iceland founder Malcolm Walker's next move in his pursuit of the group's retail arm.

Woolies rejected as "unacceptable" an approach for its 815 stores from a group headed up by Mr Walker and backed by Icelandic investment group Baugur, which has a 10 per cent stake in the retailer.

Mr Walker's offer was reportedly worth "tens of millions of pounds" and stipulated that Woolworths kept hold of its entertainment distribution and publishing arms, as well as multi-million pension fund deficit and debts.

The retailer, which has just appointed former Focus DIY boss Steve Johnson as chief executive to lead a turnaround, dismissed the approach, saying it undervalued the business and involved a complex restructuring.

Analysts have welcomed the idea of a retailing split for the group and shares were up more than 15 per cent at one point.

Woolworths, which is currently working on a strategic review, revealed last month that consultants believed it had the potential to build a sustainable business based on its small and medium-sized stores.

But John Stevenson from Shore Capital predicted worse times ahead for the stores.

He said: "We expect the core retail operations to deliver significant losses for the second half of this year and the full year as well, reflecting the impact of both weakening gross margins and like-for-like sales."

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