According to reports, Telefonica is looking to sell O2, its UK mobile operator, to British Telecom in exchange for a 20% stake in BT, as part of a "strategic alliance".
The news site EL Confidencial originally reported talks between Telefonica and British Telecom were "advanced" though no deal had yet been finalised. This morning, the Financial Times confirmed the businesses were in talks with shareholders over a possible deal.
O2 had originally been spun off from British Telecoms in 2001 when it was called BT Cellnet and was bought by Telefonica in 2005 for £17.7bn, according to the newspaper.
BT, which is the market leader in broadband in the UK, has been ramping up efforts to push into the consumer mobile market.
A BT spokesman told the Financial Times: "We have received expressions of interest from shareholders in two UK mobile network operators, of which one is O2, about a possible transaction in which BT would acquire their UK mobile business.
"All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur."