The U.K.’s Office of Fair Trading (OFT) will investigate Facebook’s $1 billion purchase of Instagram over fears that it will hurt competition among social photo-sharing apps and other social networks, according to The Guardian.

Facebook agreed to acquire Instagram back in April, but that deal has yet to close because regulators need to approve it. Facebook originally believed the deal would close before the end of the second quarter of 2012, but Facebook changed that estimate in the run up to its IPO.

The OFT regulates competition in the U.K., and it will first decide whether it has any jurisdiction over the acquisition. Second, if it does determine that it can have a say in the matter, it will decide whether Facebook could restrict other social-focused photo-sharing apps from posting to Facebook. It also has concerns about Instagram no longer posting on other websites.

The OFT has sent questions to Facebook and Instagram that it wants returned by July 5. If the OFT does not feel it has jurisdiction, it said, it will send the matter to the U.K.’s Competition Commission for review.

We’ve also seen reports that the U.S. Federal Trade Commission might be investigating the Facebook/Instagram deal.

Sherlock photo: BBC