The Office of Fair Trading (OFT) is investigating claims that the deal could restrict the use and growth of the photo sharing service, and cause 'competition concerns'.
The OFT must first decide whether Facebook's Instagram purchase falls within its jurisdiction. To qualify, the deal must create a company worth at least £70 million or with a 25% market share.
As Facebook is yet to disclose its revenue in the UK market, and the photo uploads sector has not been analysed, specific figures are unavailable.
Should the OFT find that there are no legal barriers obstructing the probe, it must then decide whether the acquisition is potentially harmful to Facebook's competition. The watchdog can then compel action from both parties, or refer the case to the UK Competition Commission.
Facebook said in a statement: "We'll continue to work closely with the OFT and look forward to answering any questions that arise."
Facebook's Instagram purchase is under similar scrutiny in the US from the Federal Trade Commission, with the ongoing investigations preventing the deal from being finalised.
Instagram, one of the world's most popular mobile apps, recently received the 2.5.0 update, adding improved commenting, speed optimisations, a revamped profile tab and other features.
The OFT's investigation will begin on July 5, with a final ruling due on August 23.