FRANK DUNN, chief executive of Nortel Networks, the telecoms equipment maker, said yesterday that he was anticipating a recovery in the battered sector later this year as demand improves.

In an interview with The Times, Mr Dunn said the upturn would result from the long-awaited deployment of third-generation mobile networks and a growing interest in covergence between fixed-line and mobile telecoms.

“In 2001 and 2002 we saw significant declines. This year is more stable, although people have been very cautious in the first half. The big change should start in the next two quarters,” Mr Dunn said, although he did not indicate how large the improvement would be.

The company’s optimism reflects that expressed elsewhere in the industry. Its smaller rival Marconi is now predicting that revenues will increase in the present quarter — the first time in two and a half years it has made such a prediction.

Canada’s Nortel is the world’s second biggest telecoms equipment maker, with annual sales last year of $10.5 billion (£6.6 billion). In common with the rest of the industry, it suffered when market demand plunged as the dot-com bubble burst. The company reduced its staff from 95,000 to 36,000, and relied on $4.2 billion of cash to get through.

Mr Dunn said he believed that a recovery would emerge in Europe before the US, largely because American carriers had been deferring decisions while the regulator determined new rules over access to the local loop — the last mile from a telephone exchange to the home.

“So far the impact of the third generation on our business has been relatively minimal. In Europe only Hutchison (Whampoa) has started . . . but it will happen soon,” Mr Dunn said.

Wireless accounts for more than 40 per cent of Nortel’s revenues, and it has third-generation contracts with Vodafone, mmO2 and T-Mobile.

Next year Nortel plans to introduce a product set that will allow carriers to launch integrated fixed and mobile services — an area that France Télécom, BT and mmO2 have all said they are keen to invest in.