Shares in France Télécom plunged yesterday as investors took fright at speculation that the French operator was poised to take over TeliaSonera, its Swedish rival, in a €33.6 billion (£27 billion) share-swap deal.

The tie-up would create Europe's third-biggest telecommunications business by market capitalisation, behind Telefónica and Vodafone, and almost certainly presage a fresh wave of consolidation in the sector.

Neither group nor their main shareholders - the French, Swedish and Finnish Governments - would comment on the rumours. However, amid signs that France Télécom is keen on the deal, analysts gave warning against a merger that they said would do little to stimulate profits.

Benoît Maynard, of Natixis, said that it was “not a good idea at all”. Rob Goyens, of Dexia, said: “We do not really see the synergies generated from such an operation, taking into account that there is almost no geographical overlap between the operations of both incumbents.”

Analysts said that a merger would be attractive to investors only if it led to job cuts - a scenario that would provoke howls of outrage from unions and politicians in France and Scandinavia.

Oddo Securities said in a note. “Financially burdensome, the operation would also be politically complex,” while Citigroup said: “We put the probability of any potential deal at below 20 per cent.”

TeliaSonera is considered a puzzling choice for the French telecoms giant. Analysts said that a deal would add little growth and saddle the group with more debt, rendering it unable to make potentially more lucrative acquisitions in emerging markets - an area that it has favoured. Martin Mabbutt, European telecoms analyst for Nomura, said: “It would come as a surprise if it went ahead. Cross-border mergers are difficult to make work at the best of times.” TeliaSonera is a merged entity of Telia, of Sweden, and Sonera, of Finland, and one that Mr Mabbutt said “does not have a great track record”. Shares in France Télécom, which operates under the Orange brand, plunged by 6 per cent to €20.86 in Paris, but TeliaSonera ended up by almost 11 per cent at Kr49.70 in Stockholm.

The movements followed a report in Le Figaro, the French daily, that France Télécom was considering a share swap as executives sought a move into booming markets in Scandinavia, the Baltic states, Russia and Turkey, where TeliaSonera is strong.

France Télécom's main markets are in France, Britain and Poland. Amid speculation that it had leaked the information to test market reaction, a source close to the former French state operator said that a merger could help it to strengthen its positions in Western Europe, a strategic objective.

France Télécom apparently is seeking sovereign wealth funds that might be willing to take a stake in the new group if the merger goes through. However, the deal would need approval from the French State, which owns 26.69 per cent of France Télécom, and from Sweden and Finland, which hold 37.3 per cent and 13.7 per cent of TeliaSonera respectively.

Analysts in Stockholm echoed fears that politicians could block cost-cutting measures, saying that they had done precisely that after the merger of Telia and Sonera in 2002.

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