By James Davey

LONDON (Reuters) - Amazon <AMZN.O> has launched a British version of its U.S. AmazonFresh food delivery service, stepping up the pressure on the traditional big supermarkets already locked in a brutal price war.

In a long-anticipated move to break into Britain's 178 billion pounds ($257 billion) grocery market, the world's largest online retailer launched AmazonFresh on Thursday in parts of central and east London.

Britain has one of the world's most developed online grocery markets with the big four retailers Tesco <TSCO.L>, Sainsbury's <SBRY.L>, Wal-Mart's <WMT.N> Asda and Morrisons <MRW.L> already competing with specialist delivery firm Ocado <OCDO.L>.

The online grocery bar is even higher in the capital.

"The entry of AmazonFresh into the UK doesn't come out of the blue but it will further worry investors about the fundamentals and prospects of the UK food retail market," said Bernstein analysts, who estimate Amazon could eventually take up to 13 percent of all food sales in the country.

Britain's online food market is expected to nearly double to 17.2 billion pounds in the five years to 2020, according to industry research group IGD.

"We are launching with a comprehensive offer in a limited area and will take our time to hone and improve our service," AmazonFresh vice president Ajay Kavan said.

AmazonFresh will initially offer a full grocery service from a distribution center in the east of the capital. It plans to use small and medium-sized external carriers for deliveries, which could be on the same day as the order.

UK ROLLOUT

Shares in Britain's listed supermarkets have been hammered in recent years as the grocery market has been convulsed by changing shopping habits, the rise of German discounters Aldi and Lidl and price competition, and analysts see AmazonFresh as a potential challenge to the whole industry over time.

"We will be very methodical and considered in how we roll this service out further in the UK," Kavan said.

Shoppers in the eligible London districts, or postcodes, who are members of the Amazon Prime subscription service will be able to choose from a range of more than 130,000 products, including about 20,000 grocery items.

Amazon will offer fresh and frozen products from Morrisons, with which it struck a wholesale supply deal in February, brands including Coca-Cola, Kellogg's, Danone, Warburtons and Walkers as well as products from local food producers and shops in locations such as London's trendy Borough Market.

Amazon Prime members in the United Kingdom pay an annual subscription of 79 pounds. They can sign up for a 30-day trial of AmazonFresh and would then pay 6.99 pounds per month for the service, with unlimited deliveries for orders over 40 pounds.

IMPACT

In the short term, Bernstein analysts reckon AmazonFresh's focus on London and its upmarket bias could mean Sainsbury's is hit the most out of the Big Four. But they said Tesco and Ocado are also exposed as they have the largest share of London-based online food sales. There was, however, little impact on stock prices following the AmazonFresh launch.

In April, Sainsbury's agreed a 1.4 billion pound takeover of Argos, a move which was seen as a defensive play against Amazon.

One food retail executive from one of the big four players said Amazon would only significantly disrupt the market if it could successfully target the 60 percent of store sales that are just small baskets.

"If Amazon can work out how to deliver those top up shops profitably and in a timely manner then I think we'll see other retailers respond and that's likely to grow the overall market share of online sales from around the 7 percent mark and accelerate the growth," he told Reuters.

Amazon launched a fresh food delivery service in Seattle in 2007 and has since moved to a handful of other U.S. cities, but it has struggled to find the best pricing model.

It has offered some food and drink items to British customers since 2010, and in November extended a packaged groceries offer already available in Germany and Japan to Prime members in Britain.

(Editing by Alexander Smith and David Clarke)