The sale of British microchip company Arm to US giant Nvidia presents “significant competition concerns” and warrants closer scrutiny, the competition regulator said, as the Government weighs up steps that could block the deal.

The Competition and Markets Authority (CMA) told Oliver Dowden, the Culture Secretary, that the $40bn (£29bn) sale of the Cambridge-based company could prevent rivals accessing Arm’s technology.

The regulator’s finding that the deal risks harming competition means the investigation is almost certain to proceed to a second phase, which could result in the regulator blocking it. 

Mr Dowden is also considering whether to ask the regulator to launch an in-depth investigation into the sale’s national security consequences. A “phase 2” investigation is likely to take another six months.

Nvidia, which agreed to buy Arm from Japanese owners SoftBank 11 months ago, has admitted that the deal is taking longer than expected to be approved by regulators. Meanwhile, rivals have criticised the deal and called for Arm to instead be floated as an independent company.

Arm, one of Britain’s most successful technology companies, designs the microchip architecture that underpins the world’s smartphones and billions of other devices. Under an open business model, it licenses the technology widely, and critics say selling to Nvidia could change this.

In an executive summary of the regulator’s phase 1 report published on Friday, the CMA said that the combined business would have “significant” control over several important technologies. The merger could also allow it to boost Nvidia’s profits at the expense of rivals in areas such as data centres, internet of things devices, connected cars and games consoles, it added.

Nvidia’s promises to ensure an “open licensing regime” were insufficient to address the concerns it had identified, the CMA said. It “does not believe any form of behavioural remedy would address the competition concerns identified to the phase 1 standard”.

The regulator added: “We’re concerned that Nvidia controlling Arm could create real problems for Nvidia’s rivals by limiting their access to key technologies, and ultimately stifling innovation across a number of important and growing markets,” said Andrea Coscelli, the CMA chief executive. “This could end up with consumers missing out on new products, or prices going up.”

Nvidia has pledged to keep Arm’s open business model and invest in the company, warning that an alternative such as a float could hit investment in the company.

Nvidia said: “We look forward to the opportunity to address the CMA’s initial views and resolve any concerns the Government may have. We remain confident that this transaction will be beneficial to Arm, its licensees, competition, and the UK.”

The deal also faces competition investigations in the US, Europe and China. Nvidia’s chef executive, Jense Huang, warned this week that the deal could take longer than its initial schedule of 18 months to be completed.