US discount chain Family Dollar has rejected a $9.7 billion takeover bid by larger rival Dollar General, saying the tie-up could run afoul of US anti-monopoly rules. 

Dollar General launched a bidding war on Monday for Family Dollar Stores, trumping a $9.2 billion Dollar Tree merger deal agreed just weeks ago. 

But Family Dollar's board said it judged that, "after consultation with its financial and legal advisors who have conducted an extensive antitrust analysis," the higher bid would not have been completed on the basis that Dollar General had proposed. 

"Accordingly, our board rejects Dollar General's proposal and reaffirms its support for the pending merger with Dollar Tree," said Family Dollar chairman and chief executive Howard Levine. 

Ed Garden, co-founder of major Family Dollar shareholder Train Asset Management, backed the decision despite the  lower value of the Dollar Tree offer.

 A  Dollar General-Family Dollar combination would have nearly 20,000 stores in 46 states and sales of more than $28 billion. That would have given it a powerful market position, despite having less than a tenth of the national sales of retail powerhouse Walmart.