The deal, which was sealed last night after two months of talks, brings back under one roof four of America’s seven Baby Bell phone companies that were created when AT&T was broken up in 1984.

SBC, which bought AT&T last November for $16.5 billion and adopted the former national phone company’s name, will complete its transformation from the smallest telecoms company in America to the biggest once the deal is complete.

However, AT&T’s move will also put the beleaguered Vodafone under fresh pressure as the deal consolidates the ownership of Cingular Wireless, the biggest mobile operator in the United States and the arch rival of Verizon Wireless, which is 45 per cent owned by Vodafone.

Arun Sarin’s position as chief executive of Vodafone has looked increasingly shaky after Friday’s U-turn over the future of its Japanese business and rumours of a boardroom split.

Verizon Wireless has been forced into second place in the US mobile market by Cingular Wireless and is expected to lose further ground as Cingular’s integration is stepped up.

Under the terms of the deal, Edward Whitacre, the AT&T chief executive, will become chairman and chief executive of the combined company, while Duane Ackerman, his BellSouth counterpart, will leave after a transitional period.

BellSouth investors will receive 1.325 shares of AT&T for each share of BellSouth they own, valuing the deal at about $37 a share or some $67 billion — a 17.9 per cent premium over BellSouth’s closing price last Friday.

“This merger is a logical next step that creates substantial value for customers and stockholders of both AT&T and BellSouth,” Mr Whitacre said.

The extra cost savings of combining AT&T, BellSouth and Cingular Wireless under one roof are expected to reach $18 billion in total and shave $2 billion from annual overheads, the group said.

The American telecoms market has been enmeshed in a complex series of demergers, joint ventures, mergers and acquisitions for the past 22 years.

With this latest deal, the deconstruction of AT&T, previously known as Ma Bell, has almost come full circle. The deal also marks a further victory for Mr Whitacre, 64, who has completed $150 billion of acquisitions since taking the helm.

AT&T said last night that it would expand its share buyback programme to $10 billion, with $2 billion to be bought back this year and $8 billion in 2007. It said that the merger would have no impact on 2006 profits and would be earnings neutral next year. The deal has yet to be approved by US competition authorities.

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