Supermarket group Safeway is to be swallowed up by smaller rival Morrisons in a £2.9 billion deal, it was announced today.

The deal, which has been recommended by Safeway's board, will bring together the UK's fourth and fifth biggest supermarket groups, creating a firm with almost 600 stores and about 140,000 staff.

The takeover will see the closure of Safeway's head office in Hayes, Middlesex, which employs 1,200 people.

It will also see the lion's share of Safeway stores rebranded under the Morrisons name, with only about 100 smaller shops hanging on to the brand.

In addition, Safeway's well-respected chief executive Carlos Criado-Perez will leave the firm.

Mr Criado-Perez has driven a three-year turnaround programme at Safeway to improve trading and win shoppers.

David Webster, chairman of Safeway, who will also leave under the deal, said: "In the last three years Safeway has turned around, adding 1.5 million customers and rebuilding profits.

"As our marketplace becomes increasingly competitive, a merger with Morrisons offers the best means of accelerating growth and delivering greater value for customers and shareholders."

To prove the success of its turnaround, the group said today it had seen its "best ever Christmas" with like-for-like sales up 4.2 per cent in the four weeks to January 4.

The group has traditionally been seen as the weakest of the top four supermarket groups - it is the fourth largest after Tesco, Sainsbury and Asda - and has long been viewed as a takeover target.

Asda has been seen in the past as the most likely suitor for Safeway and held talks with the group before it was bought by US giant Wal-Mart.

Analysts said today it was possible that another player could come in with a rival bid, with one analyst saying Morrisons' offer was not a "particularly generous one".

Richard Ratner, analyst at Seymour Pierce, said a combination of Morrisons and Safeway made sense.

He said: "It is a great deal for Morrisons."