Vodafone and O2, the UK's two biggest mobile phone operators, promised savings worth hundreds of milllions of pounds under a network pooling deal unveiled this morning.

The formerly fierce rivals, who together service 549 million customers across the globe, are to merge existing networks and build new phone sites together.

The two companies will now compete on the various services they offer instead of the quality of calls and of coverage. Reduced costs may make calls cheaper.

The unlikely collaboration comes as operators are being hit hard by the downturn in consumer spending.

Analysts had initially thought that mobile phones would be relatively immune to the recession but increasingly that is proving not to be the case. Nokia, the world's biggest manufacturer of mobile phone handsets, has given warning of a 10 per cent drop in the handset market this year.

The network sharing deal - which is expected to come under intense scrutiny from competition authorities - will see both companies retain their brand name. Telefonica owns O2.

The tie-up will initially be restricted to four markets - the UK, Ireland, Spain and Germany. However further deals are expected.

The companies said the deal would generate "cost savings amounting to hundreds of millions of pounds for both companies over the next 10 years".

It would also, they said, ensure better service levels, increase access to mobile broadband in rural areas, and reduce the environmental impact of their networks by lowering the number of mast sites.

They insisted that each company would manage its traffic independently.

Matthew Key, head of Telefonica Europe, said: "In a fast changing business climate operators need to look at different ways to serve customers both now and in the future. ..Telefonica and Vodafone will continue to compete strongly against each other in local markets, while giving our customers enhanced mobile coverage in more places using fewer mast sites."

Though the tie-up falls short of a merger, consolidation has long looked inevitable in the UK.

With a market share of about 24 per cent each, O2, Vodafone and Orange, the top three players, are focused on retaining existing customers instead of recruiting new ones.

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