The Times reports that the two companies are now going head-to-head for AOL, but that ISP was likely to fetch well below the £1bn price tag that had initially been mooted.
At the same time, it said that bidders were circling the UK division of Italian ISP Tiscali, with BT believed to be among those interested. However, Tiscali has said that the division is not up for sale.
Only last month, Tiscali acquired Homechoice for around £60m, saying it would offer a triple-play TV, broadband and fixed-line phone offer by the end of the year.
It is believed that BSkyB and Carphone Warehouse are interested in AOL's UK operations as part of their strategies to offer free broadband connections to people who buy subscriptions to their other services.
While broadband connections have grown rapidly over the last five years, the market is increasingly competitive and many anticipate that consolidation will eventually leave three or four big players.
AOL's parent company Time Warner is cutting 5,000 jobs at AOL, including about 3,000 positions in Europe.
Earlier this week, AOL Germany's internet business was to Telecom Italia for €675m (£453m) while AOL France is also up for grabs.
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