The meat was part of a consignment of 100kg (220lb) of equine flesh labelled as "diced beef" which was imported from Hungary and discovered by Lancashire County Council, the FSA said.
It was imported by Hungarian Food Ltd in Preston, Lancashire, and sold in 1kg bags on its market stall in the town and by a deli, Taste of Hungary, in Merseyside.
The remaining 60kg have been removed from sale and is being tested by the local authority for the veterinary drug bute, the FSA said.
Attila Fabian, the manager of the deli in Waterloo, Merseyside, said he ate some of the meat after taking it home thinking it was beef.
He said he was shocked to have discovered he had been selling the meat when environmental health officers visited the shop today.
He said he had bought 20 1kg bags of what he thought was diced beef from Hungarian Food Ltd in May last year, rather than import it directly, but it sold so badly that he ended up taking four or five bags home for his family.
"I didn't know about it," he said.
"It tasted like beef, it looked like beef.
"I was shocked today when environmental health told me what happened exactly."
He said they sold 12 or so bags of the horse meat, and there were still three bags in the freezer which were taken away today for tests.
He said the shop had ceased trading with Hungarian Food Ltd after they "fell out" in July last year.
An FSA spokesman said: "The Food Standards Agency has been informed by Lancashire County Council that it has identified 100kg of horsemeat imported from Hungary labelled as beef.
"The meat was imported by Hungarian Food Ltd in Preston. Investigations showed that 40kg were sold through Hungarian Food Ltd's own market stall in Preston, and through a shop in Liverpool called Taste of Hungary.
"The remaining meat has been withdrawn from sale. The meat was sold in 1kg bags labelled as 'diced beef'.
"The Food Standards Agency has notified the European Commission and the Hungarian authorities. The local authority is investigating and the meat will be tested for the veterinary drug bute."
The discovery is the latest in the ongoing scandal over horsemeat and other contamination of food products.
Many of the UK's biggest food firms and supermarkets have recalled beef products after tests found they contained horse DNA.
Aldi, Findus, Co-op, Tesco, Asda, Taco bell, Birds Eye, Sodexo, Whitbread, Birds Eye, Brakes and Rangeland were all found to have products affected.
This week Asda said its 340g tins of Chosen By You Corned Beef and Smart Price Corned Beef, withdrawn on March 8 as a precaution, had subsequently tested positive for "above trace levels" of horse DNA.
Last week Westminster Council said pig DNA had been found in Halal chicken sausages served in at least one primary school, St Mary's Bryanston Square, a Church of England school in west London.
