The high street retailer WH Smith has confirmed it is negotiating the sale of its Waterstone's book chain to the EMI Group.

The deal, if it goes through, could see Tim Waterstone return to the helm of the business he founded.

WH Smith and EMI, owner of rival bookseller Dillons, both confirmed a possible takeover is on the cards, but refused to say whether Mr Waterstone is involved.

However, he is widely believed to be playing a key role in the talks.

Last year, Mr Waterstone's plans to take over WH Smith were rejected after he put forward proposals to break up the group and sell off its Virgin Our Price record stores.

EMI was reported to be planning to set up a new company with Mr Waterstone, taking in Waterstone's, Dillons and its HMV music shops.

If the deal goes ahead it will create a new retailing giant with more than 450 stores, making it one of Europe's largest retailers of books, music, computer games and videos.

The music giant said a further announcement would be made if appropriate.

After Mr Waterstone's audacious takeover proposals in October, WH Smith unveiled a huge restructuring plan, including the demerger of Waterstone's nd the sale of its Virgin Our Price.

Although his plan failed, he was given the credit for prompting the group into taking drastic action to revive its fortunes.

Mr Waterstone set up the book business in 1981 following his dismissal from WH Smith and after building it up he sold Waterstone's to WH Smith in 1989 for £42 million, netting him a profit of £9 million.

Many analysts believe the UK book industry is set for a shakeup as US retailers Borders and Barnes & Noble move into Europe.

Last September, Borders paid #40 million for the UK's third largest independent bookseller, Books Etc.

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