* Home Retail in advanced talks to sell Homebase to Wesfarmers
* 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's comment)
By Paul Sandle
LONDON, Jan 14 (Reuters) - Poor sales over Christmas for bid target Home Retail's Argos HOME.L chain could strengthen the appeal of any offer from food retailer Sainsbury's SBRY.L , if it can convince its own investors that a deal makes sense.
The path for the supermarket to buy Argos became clearer late on Wednesday when Home Retail HOME.L said it was close to selling its Homebase DIY chain to Australian retail group Wesfarmers WES.AX for 340 million pounds. is focused entirely on the bigger Argos side of the business because of its online delivery network, with one analyst calling its surprise swoop on Home Retail either "genius or madness" when it came to light last week.
Home Retail's Chief Executive John Walden is transforming Argos into a digital business with market-leading fast delivery but 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 percent rise, as it suffered a 13 percent reduction in traditional walk-in sales in December.
A 10 percent increase in digital sales, boosted by heavy advertising of its new same-day delivery service, was not enough to compensate.
It cut profit forecasts for the year to end-Feb to the bottom of analysts' expectations, which range from 92 million to 118 million pounds.
Walden said the market had been challenging, with trading patterns disrupted by Black Friday discounts in November, but the modernization process had continued.
"The road may be inconsistent and we've experienced that recently," he told reporters on Thursday.
"(But) we are optimistic about Argos' future, whether it's Argos as an independent business or Argos as part of somebody else."
Shares in Home Retail were trading down 1 percent at 148 pence at 1252 GMT.
Walden said the ball was now firmly in Sainsbury's court. It has until Feb. 2 to make a firm offer or walk away.
"They haven't given us an offer since the original approach," he said. "We don't know what's next, if anything."
Sainsbury's said on Wednesday the deal was strategically compelling, but it wouldn't overpay. declined to comment on Thursday about the potential sale of Homebase.
Media reports say it offered about 1.1 billion pounds ($1.6 billion) for Home Retail but some investors wanted 1.6 billion pounds or 200 pence a share.
The British supermarket approached Home Retail just weeks after Wesfarmers started talks in September, and Homebase was notably absent in the reason it outlined for its interest on Wednesday.
But Walden said there was no master plan. "There hasn't been any plotting or other storyline here," he said.
Analyst Clive Black at Shore capital said with Homebase potentially off the company's books, an obstacle for Sainsbury's may have been conveniently removed.
"We are openly torn on this potential deal, but it could be inspired, inject life into the UK food retailers and bring to an end a sustained period of sector attrition," he said.
($1 = 0.6935 pounds)