Baugur, the Icelandic investment group, has put MK One, the struggling cut price fashion retailer up for sale.

The chain, which dived £17.4 million into the red last year, has been the subject of mounting speculation in recent weeks over its financial health.

It is understood that Baugur has appointed Deloitte, the accountant, to dispose of the business.

MK One has been one of the Icelandic group's most troubled investments since it was bought for £55 million in November 2004. Sales at the fashion retailer fell in the year to January 27, 2007 from £131m to £118m.

The chain faces huge competition from Primark, Peacocks and the big supermarket chains. In the last 12 months a backlash has started to emerge against cheap, throwaway clothes among ethical consumers.

Last July, Baugur brought in a new chairman, Kevin Lyon, and chief executive, Dominic Galvin, to try to revitalise the value chain.

When Mr Galvin was brought he said that he did not expect MK One to break even for three to five years.

Sources familiar with Baugur’s strategy say that MK One no longer fits with the group’s retail investment strategy. They say that Baugur plans to focus mainly on big name brands with the potential for international expansion.

The news comes just days after Baugur said that it had a £430 million war-chest available for new acquisitions after the sale of its media, technology and financial services arm in two separate disposals — both to companies that include Jon-Asgeir Johannesson, the Baugur founder, as an investor.

Baugur's other retail investments include Mosaic Fashions, which owns Karen Millen, Warehouse, Oasis, Principles, Shoe Studio and Coast. It also has interests in the department store chain House of Fraser, plus retailers Whistles, Jane Norman, and All Saints.

Meanwhile, the value of Baugur's quoted retail investments — including Debenhams, Woolworths, French Connection and Moss Bros — has more than halved since the start of the year as shares have plunged amid fears about the strength of consumer confidence.

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