Retail entrepreneur Philip Green's £850 million bid for UK fashion giant Arcadia took a bizarre twist on Thursday when police probing fraud allegations raided the Icelandic headquarters of its biggest shareholder, Baugur.

Detectives swooped on the Reykjavik-based company's offices late on Wednesday and questioned its chairman, president and chief executive as part of investigation into its relationship with US wholesaler Nordica Inc.

The company, which owns a 20 per cent stake in Arcadia and favours Green's bid, issued a strongly-worded statement in which it denied any wrong-doing and said the allegations were "without foundation".

"The alleged offences of which the chairman of the board and president and CEO are accused in the charge involve unlawful gains, among other things by approving incorrect invoices issued by Nordica Inc," Baugur said.

It added there were "substantial procedural flaws" in the court ruling that gave permission for the search and said the case description appears to involve a serious misunderstanding of both the nature and scope of business between Baugur and Nordica.

Baugur will reportedly acquire the Top Shop/Top Man and Miss Selfridge chains from Mr Green if his bid succeeds, with the Monaco-based retail guru keeping Burton, Wallis, Dorothy Perkins and Evans in a move that would give him a 12 per cent slice of the UK women's wear market.