Struggling espresso bar chain Coffee Republic has turned down a takeover approach from rival Caffe Nero.

Caffe Nero said it had made a bid at a substantial premium to the share price and was disappointed it had been rejected.

Shares in Coffee Republic rose 57 per cent, 1p to 2.75p, as Caffe Nero said it remained interested if an asking price could be agreed.

Earlier this year, Coffee Republic took over the Brighton-based Good Bean chain.

Caffe Nero fuelled takeover speculation three months ago by taking a minority stake in its rival, which has suffered a torrid year.

Sales across Coffee Republic's 107 bars have slumped as competition with market leaders Starbucks and Whitbread's Costa Coffee intensifies.

The group has put 18 of its under-performing sites up for sale and halted expansion plans.

It called off merger talks with sandwich chain Benjys last month and said it would look at alternative ways of boosting shareholder value.

Caffe Nero has always classified its 11 per cent stake in Coffee Republic as a strategic investment and denied interest in buying the business.

But the confirmation of an approach came after reports it was willing to offer at least 3p a share, valuing Coffee Republic at £6.7 million.

A merger between the two would create a chain with more than 200 coffee bars across the UK, still some way behind Starbucks and Costa.

Coffee Republic said Caffe Nero's offer was highly conditional and neither reflected shareholder value nor the prospects for the business.

The group defended its decision as it revealed it was selling 13 leasehold sites to rival Starbucks for £2 million in cash.