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* Home Retail in advanced talks to sell Homebase toWesfarmers
* Sale of DIY chain removes obstacle for Sainsbury's bid
* Argos has poor Christmas, with like-for-like sales down
* Homebase CEO says ball in Sainsbury's court
* Sainsbury's declines to comment on Homebase sale (Adds CEO comments, analyst reaction, shares, Sainsbury'scomment)
By Paul Sandle
LONDON, Jan 14 (Reuters) - Poor sales over Christmas for bidtarget Home Retail's Argos chain could strengthen theappeal of any offer from food retailer Sainsbury's, ifit can convince its own investors that a deal makes sense.
The path for the supermarket to buy Argos became clearerlate on Wednesday when Home Retail said it was close toselling its Homebase DIY chain to Australian retail groupWesfarmers for 340 million pounds.
Sainsbury's is focused entirely on the bigger Argos side ofthe business because of its online delivery network, with oneanalyst calling its surprise swoop on Home Retail either "geniusor madness" when it came to light last week.
Home Retail's Chief Executive John Walden is transformingArgos into a digital business with market-leading fast deliverybut trading at the stores has long been lacklustre.
Like-for-like sales fell 2.2 percent in the 18 weeks to Jan.2, a long way short of market expectations of a 0.3 percentrise, as it suffered a 13 percent reduction in traditionalwalk-in sales in December.
A 10 percent increase in digital sales, boosted by heavyadvertising of its new same-day delivery service, was not enoughto compensate.
It cut profit forecasts for the year to end-Feb to thebottom of analysts' expectations, which range from 92 million to118 million pounds.
Walden said the market had been challenging, with tradingpatterns disrupted by Black Friday discounts in November, butthe modernization process had continued.
"The road may be inconsistent and we've experienced thatrecently," he told reporters on Thursday.
"(But) we are optimistic about Argos' future, whether it'sArgos as an independent business or Argos as part of somebodyelse."
Shares in Home Retail were trading down 1 percent at 148pence at 1252 GMT.
Walden said the ball was now firmly in Sainsbury's court. Ithas until Feb. 2 to make a firm offer or walk away.
"They haven't given us an offer since the originalapproach," he said. "We don't know what's next, if anything."
Sainsbury's said on Wednesday the deal was strategicallycompelling, but it wouldn't overpay.
It declined to comment on Thursday about the potential saleof Homebase.
Media reports say it offered about 1.1 billion pounds ($1.6billion) for Home Retail but some investors wanted 1.6 billionpounds or 200 pence a share.
The British supermarket approached Home Retail just weeksafter Wesfarmers started talks in September, and Homebase wasnotably absent in the reason it outlined for its interest onWednesday.
But Walden said there was no master plan. "There hasn't beenany plotting or other storyline here," he said.
Analyst Clive Black at Shore capital said with Homebasepotentially off the company's books, an obstacle for Sainsbury'smay have been conveniently removed.
"We are openly torn on this potential deal, but it could beinspired, inject life into the UK food retailers and bring to anend a sustained period of sector attrition," he said.
($1 = 0.6935 pounds) (Additional reporting by James Davey; Editing by Mark Potterand Elaine Hardcastle)
