Spanish mobile phones group Telefonica has launched a £17.7 billion agreed takeover offer for O2, in a move that could spark a bid battle for its much circled British rival.

Shares in O2 surged more than 25 per cent higher on confirmation of Telefonica's offer, rising above the 200p a share it has tabled to stand at 206.5p going into the end of morning trading.

The huge advance strongly suggests that investors - many of whom are small shareholders - believe a rival bidder may force an auction for the British mobile group.

Telefonica, the world's fifth-largest mobile phones group, said taking over O2 - which has also been linked with potential predators such as Deutsche Telekom of Germany and KPN of the Netherlands - would enable it to enter the German and British telecoms markets, two of Europe's largest.

The Spanish group said it expected the deal, which should be completed by next January, to enhance its earnings immediately and promised O2 shareholders that they would still receive an interim dividend at the beginning of December.

Today's offer from Telefonica marks the largest all-cash takeover deal ever in Europe and the second-largest ever worldwide, according to investment banking data and research firm Dealogic.

In terms of size for cash deals it is dwarfed only by last year's takeover of AT&T Wireless Services in the United States by Cingular Wireless, which was worth $46.77 billion, according to Dealogic.

As it launched its 200p a share cash offer, Telefonica said combining the two groups should generate annual savings of just under £200 million a year by 2008.

Bringing the two groups together would create considerable benefits based on economies of scale and would dramatically advance the takeover fever that has been gripping the sector for months.

Shares in Virgin Mobile rose 10 per cent this morning as some in the City predicted that Telefonica's move would spark renewed interest in telecoms providers and equipment resellers.

But although an O2 takeover would be clearly transforming for both companies, it is unlikely to have a noticeable effect on consumers, particularly in Britain.

Under the terms of Telefonica's proposals, O2 would continue to operate its existing brand and would remain headquartered in the UK.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax