Shares in Carphone Warehouse posted sharp losses today after Vodafone, Britain's largest mobile operator, said it would drop the group from selling mobile phone contracts in favour of rival Phones 4u.

Shares in the retailer were down 57.25p or 16 per cent at 304p in morning trade. To track the stock click here.

The fall underlined Carphone's exposure to high street handset sales, despite a high-profile drive to become a major high-speed internet supplier. The group yesterday announced the acquisition of AOL's UK internet access business from Time Warner for £370 million, a deal that catapaulted it to third place in the UK internet access market.

A Vodafone spokesman said the decision to dump Carphone from selling contracts would reduce its commission charges as Phones 4u could now expect greater sales volumes.

Analysts suggested the move could save Vodafone as much as £40 million a year in commission costs and reduced customer churn. UBS, the brokerage, said in a note: "We view this [as] indicative of a more proactive approach from Vodafone on the cost side - welcome in a maturing market"

Churn rates - which measure customers who switch between networks - are one of the mobile industry's biggest headaches, but high churn generates commissions for retailers.

However, the hit on Carphone could be limited, Merrill Lynch suggested, with Vodafone contracts accounting for around 2.5 per cent of group sales.

Vodafone added that Phones 4u's young customer base fitted with its own focus on to 16- to 34-year-olds and would give it greater control of its customer base.

Vodafone said it would continue to sell contracts through small independent retailers but it will also drop The Link, owned by O2, and Dial-a-Phone. Carphone will continue to sell Vodafone pay-as-you-go deals.

Carphone Warehouse said in a statement: "Vodafone approached Carphone Warehouse to enter into the same arrangement as they have today announced with Phone 4 U. It would have meant guaranteeing to sell a high percentage of Vodafone subscriptions no matter how competitive the offer was for customers."

Phones 4u was bought by private equity group Providence from founder James Caudwell in August for £1.5 billion. It currently operates from 384 sites in the UK and has plans to expand to 450 by mid 2007.

News of yesterday's acquisition of AOL UK came as Carphone suffered a further setback to its "free" broadband effort as installation delays and increased customer services costs forced it to bump up expected start-up losses on the project by 40 per cent to £70 million.

Vodafone shares were down 0.5p, or 0.4 per cent, at 130p. To track the stock click here.

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