Last checked at 
* Amazon agrees wholesale supply deal with Morrisons
* Deal marks biggest assault yet on British food market
* Rival share prices sink on competition fears (Adds background on Amazon in the US)
By James Davey and Kate Holton
LONDON, Feb 29 (Reuters) - Amazon has launched itsbiggest foray into food outside of the United States with a dealwith British supermarket Morrisons to offer fresh andfrozen goods to customers, in some places as quickly as underone hour.
Enabling the online retail giant to compete with Britain'sbiggest supermarket stores and smallest local shops, the dealopens another front on Amazon's assault on the 178 billionpounds ($247 billion) British grocery market, already hammeredby a brutal price war and changing shopping habits.
Amazon will now add hundreds of fresh and frozen products toits existing offering of packaged grocery goods, setting it upto take on Tesco, Sainsbury's and Wal-Mart's Asda, as well as online specialist Ocado, inone of the world's most developed online retail markets.
"The advance of Amazon as a participant in UK grocery is apotential challenge to the whole trade, in time," Shore Capitalretail analyst Clive Black said on Monday. "Any new entrant is,but particularly the American behemoth."
The tie-up boosted shares of Morrisons, Britain's fourthlargest supermarket, which has been a laggard in online sales.Since 2013 it has outsourced logistics for its own online foodbusiness to Ocado.
Morrisons shares rose 5.6 percent. Those of Ocado fell 9.3percent on fears the deal would increase competition and reducethe likelihood that Amazon could one day buy it. Market leaderTesco's shares fell by 3 percent.
"Tesco could soon be about to find out what it's like to beDavid rather than Goliath," said Retail Vision consultant JohnIbbotson. Amazon has a market cap of $261 billion.
The UK grocery market has been convulsed in recent years bythrifty shoppers turning to discounters Aldi and Lidl,convenience stores and online shops. The British RetailConsortium predicts that 900,000 retail jobs could go by 2025 asthe industry moves online.
Amazon, the world's largest online retailer, launched afresh food offering in Seattle in 2007 and has moved to ahandful of other U.S. cities since then, but it has struggled tofind the best pricing model, with fresh food proving one of thetoughest nuts to crack.
After waiving the membership fee for several years, Amazonfinally said last year it would begin charging customers $299 ayear for its Prime Fresh membership in the U.S.
Its expansion into food in the rest of the world has focusedso far just on packaged goods due to the complexity ofdelivering fresh and frozen products. However, it is keen toextend its offering, just as supermarkets are increasinglycompeting on its home turf by selling more non-food productsonline.
RANGE LIMITATION
The Morrisons tie-up stops short of replicating its broaderU.S. Amazon Fresh service, which offers about 20,000 chilled,frozen and perishable products and items from local shops thatanalysts have long speculated Amazon was targeting for the UK.
But it gives Amazon a platform to attack a UK online grocerymarket predicted to nearly double to 17.2 billion pounds in thefive years to 2020, according to industry research group IGD.
It has offered some food and drink items to Britishcustomers since 2010, and in November it extended a packagedgroceries offer already available in Germany and Japan to AmazonPrime subscription members in Britain. Last year it added asmall range of chilled and frozen items to its Prime Now servicewhich offers one-hour delivery in Britain's two biggest cities.
Amazon has also begun surveying UK customers about their useof restaurant delivery services, in what analysts said waslikely the first step in an international expansion of abusiness it rolled out in the U.S last September.
Morrisons, with a smaller footprint in the more affluentareas of London and the south east of England than Tesco andSainsbury's, may have gambled that it could cope better with thearrival of Amazon which would typically target those areas.
Morrisons makes half of all the own brand and fresh food itsells, a greater share than other British supermarkets, and hasspare capacity to service Amazon's needs.
Morrisons announced separate plans on Monday to extend itsown online grocery deliveries to the whole of the UK, inagreement with Ocado. It would take space in a new Ocado Londonwarehouse while Ocado will provide Morrisons with software tofulfil online orders from its own stores.
For Morrisons, a tie-up with outside giants like Amazonmight be described as "letting the barbarians in", said analystsat brokerage Bernstein.
Nevertheless, the deal could be "a convenient divide-andconquer outcome where Amazon and Morrisons specialise where theyare best and support each other mutually," Bernstein said.
"Morrisons may feel that Amazon isn't really a threat forits smaller stores in the North of England; on the contrary onour recent store visit, we saw a nice new shiny Amazon lockerunit for picking up Amazon parcels."
($1 = 0.7212 pounds) (Additional reporting by Emma Thomasson in Berlin and MariSaito in San Francisco; Editing by Peter Graff)
