THE German holiday giant Thomas Cook has recruited Citigroup to advise it on a £500m bid for the package-holiday business of First Choice.

First Choice, the UK-quoted holiday company, is understood to have sent out an information memorandum on its “mainstream” tour business — which include its Mediterranean tour operations and part of its in-house airline, First Choice Airways — shortly before Christmas.

City sources believe the bidding is likely to end in a two-way fight between Thomas Cook and MyTravel, another UK-listed travel group, although they do not rule out the emergence of a third bidder.

Whoever wins between Thomas Cook and MyTravel will become market leader in UK package holidays. “I think it will be very fiercely contested because the person who loses will be left in quite a weak third place,” said one banker.

Britain’s package-holiday companies have had a torrid time this year. Bookings slumped because of the World Cup and the hot summer.

Indications for the coming year are not promising. Although the new year is traditionally a busy season for holiday sales, vicious price wars have already broken out, with tour operators worried that recent increases in air-passenger duty will further knock consumer demand.

Ski-holiday sales have also been affected because of a lack of snow in the Alps.

Industry sources say winter bookings are down about 13% year-on-year, while bookings for summer 2007 are 17% lower than this year.

Thomson Holidays — another German-owned player in the market — last week launched a “guaranteed £100 off” sale for January.

Thomas Cook has instigated a “price-watch promise”, its pledge not to be undercut by rivals.

Tough times in the UK market have precipitated consolidation talks among all the big players.

The Sunday Times revealed last month that First Choice was in talks with MyTravel about a possible sale of the former’s mainstream holiday division. It is understood that First Choice boss Peter Long has decided to sell the operations — if he can achieve the right price — and concentrate instead on accelerating the group’s expansion into high-margin specialist holidays.

Last week Long stepped up his drive away from the traditional package business by paying £120m for an online travel company, Laterooms.

The website allows travellers to compare hotel rooms and book them at the last minute. The deal took Long’s tally to 13 acquisitions in the year.

Analysts believe Long will use the returns from the auction of the mainstream business to continue his acquisition plan, although he may consider returning some of the proceeds to shareholders.

Thomas Cook has been linked with a bid for the First Choice business for some time, but the way was only cleared for it to proceed a week ago, when a tussle over its ownership was finally sorted out.

Karstadt Quelle, the German retail group, took control of the company two days before Christmas by buying the half-share owned by Lufthansa, the German airline.

Karstadt paid €800m (£540m), though Lufthansa will for at least the next two years retain a stake in Condor, Thomas Cook’s in-house airline in Germany.

Thomas Middelhoff, Karstadt’s chief executive, said the move would allow Thomas Cook to take part in the “consolidation of the European travel market”.

MyTravel, led by chief executive Peter McHugh, has retained Credit Suisse and UBS to advise it. First Choice is being advised by Lazard and Deutsche Bank.