Caffe Nero has withdrawn a potential offer for Coffee Republic, claiming the rival chain had "refused" to co-operate with takeover discussions.

The group said it was proposing to offer 4.5p a share, valuing the struggling chain at £10.1 million compared with a current market value of £6.2 million.

The bid was dependent, however, on a recommendation from Coffee Republic and due diligence.

Caffe Nero claimed: "Coffee Republic's board has refused to enter into any discussions regarding this proposal and has not allowed Caffe Nero access to verify standard issues."

It said it was unwilling to overpay and had therefore decided not to proceed with the offer.

Under takeover rules, a hostile bid must be more than the 4.5p Caffe Nero is thought to have paid when it took a near 11 per cent stake in its rival in August.

Caffe Nero, which runs more than 100 coffee bars, was told by the Takeover Panel last month to make a formal bid by noon on Monday or stay on the sidelines for the next six months.

But Coffee Republic said it had provided Caffe Nero with information as well as holding regular meetings.

Chairman Bobby Hashemi said: "In our view, they had more than enough information to make a formal bid.

"The panel ruling told them to put up or shut up, especially given that they are an active rival of ours.

"The board has met several times with Caffe Nero since the summer and not once was a formal unconditional offer put on the table. It's unsettling for a company to be under siege constantly. It was affecting our relationship with our suppliers, our customers and our staff."

Caffe Nero first tabled an indicative approach in November, which Coffee Republic said at the time undervalued its prospects.

But in a statement to the City last week, Caffe Nero said it did not know how Coffee Republic would deliver shareholder value in the next few months over and above its offer.