(Adds background, analysts' comments)
By Shailaja Sharma and Sruthi Ramakrishnan
June 27 (Reuters) - Dollar General Corp said CEO Rick Dreiling will retire next year, throwing into doubt a proposal by Carl Icahn to merge the discount retailer with Family Dollar Stores Inc.
Dollar General's shares fell as much as 8 percent and Family Dollar's as much as 4 percent in morning trading on Friday.
Both companies face increasing competition from big-box retailers such as Wal-Mart Stores Inc that are also competing for business from low-income families, who themselves have been hit by cuts in benefits such as food stamps.
Icahn said earlier this month he was considering pushing Family Dollar to sell itself to Dollar General to help the companies cope with intensifying competition.
The departure of Dreiling, 60, who has been chief executive since January 2008, throws a wrench into Icahn's proposal, analysts said.
"We think it is very unlikely Dreiling's eventual successor would be inclined to immediately risk his or her legacy by making a very large and transformative acquisition early in their tenure," said BB&T Capital Markets analyst Anthony Chukumba wrote in a note to clients.
Sterne Agee & Leach analyst Charles Grom said the recent promotion of Todd Vasos to chief operating officer from head of merchandising suggested the company has a succession plan.
Dollar General had been a chronic underperformer before Dreiling took over and is now the clear leader among U.S. deep-discount retailers, Chukumba said.
Under Dreiling's leadership, Dollar General's annual sales increased by more than 80 percent to $17.5 billion in 2013 and its store count increased by 38 percent to more than 11,000, the company said.
"Rick Dreiling is a legend in the grocery and dollar space and one of the most highly respected CEOs out there, so losing him is clearly a negative for the company," FBR Capital Markets analyst Dutch Fox, who also sees Vasos as a likely CEO, told Reuters.
Dollar General's share price has nearly tripled since the company was listed on the New York Stock Exchange in November 2009.
Dreiling, who has also been chairman since December 2008, will continue in that role during a transition period following the appointment of a new CEO, the company said on Friday.
Dollar General said its board would conduct an internal and external search for a new CEO. Dreiling will stay on as CEO until May 30, 2015 or until the appointment of a successor.
The company's shares were down 6.5 percent at $57.64 at midday. Up to Thursday's close, Dollar General's shares had risen 6.3 percent since Icahn, who holds about 9.39 percent of Family Dollar, pushed the idea of a merger.
As of Thursday, Dollar General had a market value of $18.71 billion, while Family Dollar was valued at about $7.7 billion. (Reporting by Shailaja Sharma in Bangalore; Editing by Saumyadeb Chakrabarty)