The Government is in exclusive talks to sell the Tote to a racing industry consortium, after the group made a formal offer for the state-owned bookmaker.

A spokeswoman for the Department for Culture, Media and Sport said that it was in “closed discussions” with the bidder and that it was “looking to make a sale to the racing consortium at full market value”.

Talks began in the spring between the Government and the group, which includes: Arena Leisure, the owner of several racecourses; the Racecourse Holdings Trust, which is part of the Jockey Club and owns the Aintree and Cheltenham courses; and the Racehorse Owners Association. Northern Leisure, which had been involved in the negotiations, withdrew last month.

The Government is believed to have set a deadline of the end of last month for a formal bid to be launched.

However, the sale will run into problems if the European Commission deems it to be short of its market value. The Commission has said that a sale below market value would be tantamount to state aid for the racing industry.

Analysts value the business at between GBP 400 million and GBP 550 million. PricewaterhouseCoopers, the accountancy firm that is working with the Government on the sale, is thought to favour a figure nearer to GBP 400 million. The department is refusing to put a value on the Tote.

If the talks fail to deliver a sale at market value, then the Government probably will be forced to put the sale out to the open market, where other bookmakers could make a bid. With the two leading bookmakers, Ladbrokes and William Hill, likely to be excluded on competition grounds, other smaller operators such as Gala Coral could make a move.

However, Labour would probably avoid some political controversy about privatisation if it sold the Tote to an industry consortium rather than a rival bookmaker.

The Government is under increasing pressure from unions and backbenchers about privatisation in the National Health Service, the Civil Service and in other public bodies.

Unions are aiming to make privatisation one of their key battlegrounds as the race for the Labour leadership gets under way.

Labour said that it would sell the Tote, which has 540 betting shops, in its 2001 election manifesto and put through legislation to enable the sale three years later.

The Tote, which was established in 1928, made profits of GBP 23.4 million on a turnover of GBP 2.2 billion last year. Its profits are put back into various aspects of horse racing.