Ladbrokes and Coral may have to offload 350 to 400 high street stores as a condition of their proposed £2.3 billion merger, the Competition and Markets Authority has said.
The CMA found that the merger could "result in a substantial loss of competition" in the gambling market at both a national and local level.
In a report detailing its provisional findings, the antitrust regulator's inquiry chairman Martin Cave said: "We've provisionally found that the merger between two of the largest bookmakers in the country may be expected to reduce competition and choice for customers in a large number of local areas.
"Although online betting has grown substantially in recent years, the evidence we've seen confirms that a large number of customers still choose to bet in shops - and many would continue to do so after the merger."
The proposed merger would create Britain's biggest bookmaker with around 4,000 betting shops, but the CMA has identified 659 areas across the country where the deal could harm competition.
Mr Cave said that punters could lose out from a "reduction of competition and choice" and the deal could also "worsen those elements that are set nationally, such as odds and betting limits".
Ladbrokes and Coral are currently the second and third-biggest betting operators after William Hill.
The CMA is aiming to publish its final report by the end of July.
Analysts believe that significant cost savings can be made if the deal gets the green light.
Steve Clayton, head of equity research at Hargreaves Lansdown, said: "A merged Ladbrokes and Coral will have a dominant retail position, even if many shops have to be sold off. We expect substantial cost saving will be possible because there will be vast areas of overlap and unnecessary duplication of functions across the combined business."