Telefonica, the Spanish telecoms company, yesterday confirmed it was in talks with Dutch rival KPN Telekom about a possible €160bn (£90bn) merger.

Analysts said a deal could spur further consolidation among Europe's longer established national telephone companies as they try to keep up with newly merged US firms such as MCI WorldCom and Sprint and mobile phone firms such as Vodafone.

Analysts said a mobile telecoms tie-up would boost the two carriers' ability to buy competitors and gain costly third generation mobile licences. Telefonica pulled out of the race for one of the UK's third generation licences, saying it would pursue cheaper options.

KPN Mobile has about 8.5m customers and is active in central and eastern Europe while Telefonica says it has 20m wireless clients in Europe, Latin America and North Africa.

The Dutch group's shares rose nearly 10% yesterday. Spain's stock market was closed for the May Day holiday.

"An alliance or merger would be good added value for both companies whose activities and ideas are similar," said Henk van de Meent, an analyst at NIB Capital. "It could be quite a powerhouse, especially when other parties are involved as well."

A spokesman for Telefonica said: "The company has been holding conversations with KPN on several matters, including the possibility of inte gration of all or part of their businesses.

"However, no definitive agreement has been reached and there is no certainty that the mentioned conversations will give positive results."

KPN said earlier it would delay the initial public offering of KPN Mobile, Europe's seventh largest mobile operator, because of talks with a possible new partner.

The two are reported to be considering creating a company 60% owned by Telefonica and 40% by KPN.