Southern FM's owner Capital has been given the all-clear to pursue its groundbreaking merger with rival radio group GWR.

The Office of Fair Trading (OFT) said it had decided against referring the £700 million deal to the competition authorities.

Instead, only minor adjustments will be made to the merger, which City analysts predict will spark a wave of consolidation.

The integrated business will save the companies about £7.5 million a year in costs and soak up 40 per cent of radio advertising in Britain.

It will also make Southern FM, which serves Brighton and Hove and Sussex and whose DJs include Sam Hughes and Jo Jacobs, a member of the biggest commercial radio group in the UK.

The tie-up is expected to be finalised in the spring after Capital agreed to dispose of Nottingham-based Century 106 FM to ease competition fears in the East Midlands.

Vincent Smith, the OFT's director of competition enforcement, said: "Except in the East Midlands, the radio stations of Capital and GWR do not strongly overlap at a local level.

"So for national advertisers putting together a radio advertising package, they are largely complementary, rather than competing, alternatives.

"However, the merger would result in a substantial lessening of competition in the East Midlands.

"The parties have offered to divest Century 106 FM to address the identified adverse competition effects."

In an accompanying statement, industry regulator Ofcom said it intended to change two GWR radio licences to safeguard local programming.

In a joint statement, the boards of GWR and Capital welcomed the OFT's decision.

GWR executive chairman Ralph Bernard said: "This is a merger of two complementary businesses that will strengthen the UK radio industry and we are very pleased OFT and Ofcom are satisfied it can proceed."

Capital chief executive David Mansfield said: "This is good for listeners and for the radio industry."

GWR, which has a wide portfolio of radio stations across the UK, announced half-year profits up 12 per cent to £6.9 million.

Capital said last month it had seen a slowdown in spending by key advertisers at the end of a challenging year, in which the group's underlying profits rose four per cent to £23.7 million.

Consolidation in the industry has been widely expected following the Communications Act, which changed the rules governing the merger of radio companies.