Sainsbury's is embroiled in a two-way battle for Argos with South African company Steinhoff International and both suitors have until 1700 GMT on Friday to make a firm offer or walk away.

The UK supermarket made a cash and shares proposal for Home Retail in February worth 1.3 billion pounds but Steinhoff trumped that offer with a 175 pence per share proposal later in the month valuing it at 1.44 billion.

Speaking to reporters on Tuesday, Sainsbury's Chief Executive Mike Coupe was tight-lipped about his next move, beyond reiterating that he will not overpay.

"It's by no means a must do deal. We've said there's a price and we won't go beyond that," he said.

Coupe dismissed the suggestion that a failure to land Argos would leave a major question mark over Sainsbury's strategy.

"You can see from the (fourth quarter) numbers that the business has moved forward well on a number of fronts," he said. "There's no reason why Sainsbury's wouldn't be a successful business in the future without Argos."

When it unveiled its takeover proposal on Feb. 2, Sainsbury's said it wanted to buy Home Retail to accelerate its growth by creating the country's largest general merchandise retail business.

Sainsbury's said sales at stores open more than a year rose 0.1 percent, excluding fuel, in the nine weeks to March 12, ahead of analyst forecasts in a range of unchanged to down 0.6 percent and a third quarter fall of 0.4 percent.

Sainsbury's, which has shown greater resilience to competition from German discounters Aldi and Lidl than its big four rivals - market leader Tesco, Asda and Morrisons - said it expected the market to remain competitive as food deflation continued to impact sales growth but was confident it would outperform its peers.

DEADLINE LOOMS

Last week, Home Retail reported improved trading at Argos and said its year-end cash balance would be some 100 million pounds above analyst forecasts - factors that will have to be taken into account in any raised offers from either Sainsbury's or Steinhoff.

Under UK takeover rules, whichever company bids first triggers a 53-day extension for their rival, effectively creating a game of "chicken" as each weighs up a bid.

Shares in Home Retail have soared more than 80 percent since news of a possible bid from Sainsbury emerged on Jan. 5. They were trading down 0.1 percent at 182 pence, still indicating the market expects increased offers.

Sainsbury's needs to support its share price, given that more than half its proposed offer is in equity. Its shares have increased 17 percent over the last month but were down 0.2 percent at 280.2 pence, valuing its proposal at 172 pence.

"We expect Sainsbury to try again," said Shore Capital analyst Clive Black.

Steinhoff, however, which has a retail presence in the United Kingdom through Bensons Beds and the Harvey's furniture chain and is also bidding for French electricals retailer Darty, has a market value of about 21 billion euros, or nearly three times that of Sainsbury's.

"Our central case is that an upped Sainsbury's offer loses out to a sweetened, all-cash Steinhoff counter-bid," said analysts at Jefferies.

(Editing by Kate Holton and David Clarke)

By James Davey