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Two French food giants are locked in a battle to take over Brazil's number one retailer, Grupo Pao de Acucar.

Proposals to merge Pao de Acucar with the local operations of Carrefour are opposed by rival Casino, which already has a stake in the Brazilian group.

The proposed Pao de Acucar-Carrefour deal would create a firm with a 27% market share and sales of more than $40bn (£25bn) a year.

Pao de Acucar is already Latin America's second-biggest retailer.

As well as its Pao de Acucar and Extra supermarket chains, it also has a majority stake in the Ponto Frio and Casas Bahia chains that sell electrical goods and furniture.

Pao de Acucar's shares rose 12.6% on Brazil's main stock exchange on Tuesday after news of the deal emerged.

Brazilian investment fund Gama announced the merger plan on Tuesday. Under the terms of the offer, it will combine Pao de Acucar and Carrefour's Brazilian assets into a new company, to be called Nova Pao de Acucar.

Gama said investment fund BTG Pactual and the BNDES state development bank had committed $2.8bn to the deal, as well as $710m in debt financing.

The deal followed talks between Carrefour and Pao de Acucar chairman Abilio Diniz, whose family founded the firm in Sao Paulo in 1948.

Since 1999, Pao de Acucar has been part-owned by another French firm, Casino, which denounced the proposal to merge with Carrefour as "illegal".

Casino said it was disappointed with Mr Diniz for negotiating a deal without its authorisation.