Ottakar's, the bookstore chain that this month agreed to a £96m takeover by HMV, today reported deteriorating sales in recent weeks and said losses had deepened in the first half of the year.

It said same-store sales had fallen 3.8% in the last two months and were down 0.2% in the six months to June 30.

The company, which agreed to HMV's 440p a share offer after having previously supported lower bids from management, said pretax losses had increased to £4.7m from £2.9m in the same period last year.

Ottakar's, which has already issued two disappointing trading updates this year, has been hit by supermarkets and online retailers offering heavily discounted deals on bestsellers such as the latest Harry Potter book.

Founded in 1987, the chain enjoyed initial success by opening stores in areas not covered by bigger rivals such as Waterstone's.

"Conditions on the high street have weakened over the summer," Philip Dunne, the Ottakar's chairman, said in a statement. "In the circumstances, our stores appear to have fared relatively better than others."

The company's fortunes will depend heavily on the key Christmas period. It believes it has a strong lineup of titles for the end of the year, including books from the forthcoming television series by the chef Jamie Oliver.

Ottakar's, which operates 137 stores, agreed to be acquired by HMV in a deal which would give the combined group 23.6% of the book market - below the crucial 25% threshold arousing competitive concerns.

HMV has sent a submission to the Office of Fair Trading in support of its view that a takeover would not give rise to any material competition issues.

The music company, which owns Waterstone's, said savings would be achieved by applying its IT systems to Ottakar's. A combined Ottakar's and Waterstone's would operate 325 stores in Britain.