Railway enthusiasts who snapped up a piece of land eyed by Sainsbury's for £1, have entered into talks with the supermarket giant.

The Bluebell Railway was offered the site, next to East Grinstead station, for a nominal sum as part of a long-standing deal.

But the sale appeared threatened when Sainsbury's offered £660,000 for the plot.

That bid was turned down by the rail regulator earlier this month, apparently preserving the land for a future track extension.

But The Argus can reveal the steam enthusiasts are prepared to enter into talks with Sainsbury's.

A spokeswoman for Sainsbury's said: "I can confirm that Sainsbury's is no longer negotiating directly with Network Rail for the acquisition of land adjacent to the East Grinstead store.

"Talks are, however, progressing with the Bluebell Railway to investigate the opportunities to create a development that would be mutually beneficial to all parties."

The David and Goliath-style dispute started when Sainsbury's contacted Network Rail hoping to buy land at East Grinstead station for a car park extension.

Bluebell bosses had planned to extend their track from Kingscote right the way through to the national rail network at East Grinstead, and build a station on the old track bed.

The steam railway, which already preserves a five-mile stretch of the former Lewes to East Grinstead line between Sheffield Park and Horsted Keynes, had struck a deal with Network Rail several years before.

The agreement, outlined in a letter of intent, set aside the land in return for Bluebell renovating and maintaining the nearby Imberhorne viaduct.

As the society had just finished a £175,000 project returning the viaduct to its original splendour, members were horrified to find their plans might be dashed by the wealthy supermarket's higher bid.

Although the letter of intent was not legally binding, two weeks ago the rail regulator ruled in favour of Bluebell Railway, deciding it would not be in the town or the railway's interest for Network Rail to sell the land to Sainsbury's.

Bluebell has received widespread support from local residents and the town council, as it is hoped the proposed extension would bring tourism into the town and boost trade when the service is running in 2005.

Bluebell members met for a board meeting on Monday night to discuss the next step.

Tim Baker, Bluebell commercial director, said: "We are thrilled that the Rail Regulator decided the land should not be sold to Sainsbury's.

"However, first we have to cement the deal with Network Rail. It is possible the land could be covenanted over for rail purposes only.

"Once it's signed, sealed and delivered, we will look at what we can do as a whole with other parties.

"It would be ideal if we could all work together - Sainsbury's, the town council and Network Rail."

If this is the case, Bluebell Railway could stand to make a substantial profit from its £1 site.