The next generation of mobile phones with continuous internet access is supposed to herald a new era of economic prosperity for Europe.

But if the past few weeks are anything to go by, the cost of developing the phones may puncture the boom before it even gets underway. Earlier this year the giant European telecom operators were the darlings of the stock market. They could do no wrong as they planned their strategies to capture as much market share as they could for 3G (third generation) mobile phone, an item that could become the biggest selling consumer product of all time.

Then came the government's auction for radio spectrum. It forced some of the world's biggest telecom companies to drop their guards and pay a ludicrous £22.5bn for the five UK licences on offer, far more than the wildest optimist had predicted.

Most of their reasoning was negative. The companies could not afford to bid so much but they also couldn't afford not to. They were terrified that if they were seen to be out of the race for the 3G market, their shares would collapse on the stock markets.

Meanwhile, in Finland they virtually gave away the licences away after a "beauty contest" in order to accelerate the development of cheap access to all. But that is another story. As it turns out, the phone companies' stock market ratings have collapsed anyway. Shares of the big performers have fallen by a fifth while the value of Deutsche Telekom has more than halved (to £72bn).

British Telecom's market capitalisation was low to start with because of its slowness to work out a strategy that investors thought credible. Even so, its shares have fallen by more than 50% since their peak this year leaving the once almighty UK corporation vulnerable to a takeover bid. It is now valued at only £46.6bn compared with Vodafone at £155bn.

The extra debts that the companies acquired to finance the purchase of spectrum led to a downgrading of most of their credit ratings from "double A" to "single A" which means it will cost them more to borrow.

Now the fall-out from the spectrum sale has moved to the banks themselves. Bank regulators in Europe are looking into loans totaling £117bn made to European telcos. They are worried about banks becoming overdependent on one sector. In Europe this year more than 40% of syndicated loans were accounted for by telecom companies.

This is reviving memories of previous occasions when banks became overexposed to a single vulnerable sector - property in the early 1990s and hedge funds in the late nineties (and sovereign debt much earlier). Telecom companies are now being forced into fire sales of other assets to bring their debt ratios down to levels acceptable to the banks.

M eanwhile, there are renewed doubts about the longevity of the hi-tech boom in the US. The current issue of Business Week - hitherto a leading advocate of the New Economy - carries an edited version of a new book (The Coming Internet Depression) by one of its senior writers. It warns that the process that led to the prolonged hi-tech boom in the US could be thrown into reverse if the stock market collapses and the boom in venture capital (which depends on a booming stock market) goes into reverse thrust.

But, even if the internet bubble does not burst, the problems for telecoms in the UK betting their companies on 3G are formidable. The huge amount paid upfront for spectrum has to be matched by an equivalent amount to develop the huge infrastructure needed to deliver the new technology, prompting worries that prices will be too high to create a mass market.

Some economists say that the huge sums spent on 3G licences won't matter because they are "sunk costs" shared by all the operators and that as long as there is a competitive market prices need not be excessively high. That isbarmy. Nothing is for nothing and the effects of overpayment can already be seen in the collapse of the telcos' market capitalisations - which is only the start of a chain reaction.

Third generation companies, desperate to get a return on their investments, may cherry pick the areas they exploit or go for the more lucrative corporate markets first while cutting down on research and development in other areas. Prospects haven't been helped by the poor reception that the over-hyped Wap (wireless application protocol) phones have received in this country.

But make no mistake, the prospects for the next generation of phones that will always be connected to the internet are still awesome. It will eventually be the best selling product the world has ever known (with the need to buy an improved model every three or four years).

Never before has there been an interactive consumer product that virtually everyone in the developed world will have with them all the time. And that small "always on" screen (which you are bound to look at when you start to use it) will quickly become the most expensive bit of real estate in the world for advertisers and marketers.

It will always be difficult to turn mobiles into a major advertising medium because users would be put off by constant adverts in that small space - but not when you access it initially in standby mode. That screen is far too valuable to have words like Vodafone or Ericsson or Nokia stuck on it since it will be the place where advertisers can promote their wares knowing who you are, where you are and when you are.

The unanswered question is who will ultimately own the space. It would be ironic - but perfectly possible, if the stock exchange valuations of the 3G telcos, burdened down by the huge cost of exploitation, led to takeover bids from outside predators.

And no predators would be in a better position than those in countries like Finland where free licensing enabled the phones to come to a mass market very quickly thereby giving them the cash flow and the strong balance sheets needed to acquire overstretched rivals.

Watch this space.