A new powerhouse in the internet market was created last night when Spanish service provider Terra Networks agreed a $10.6bn (£6.5bn) deal to acquire Lycos, the American web company.

Terra, which is controlled by Spain's former state telephone company Telefonica, is already the largest internet business in Europe and the deal creates a strong competitor to the headlining US internet firms.

Some estimates said the combined group would be one of the four largest internet operations in the world.

The deal is the latest in the rapid consolidation of the still fledgling internet industry as businesses seek to establish dominant positions. Terra plans to offer about 1.7 shares for each in Lycos, valuing it at $96.70 a share.

Established in 1998, Terra has attracted millions of Spanish and Portuguese-speaking internet users in both Europe and Latin America.

Analysts said the deal with Lycos would open doors in the US, which has an estimated 35m Spanish speakers with an average income well above that of their counterparts south of the border. Terra has a market capitalisation of around €19bn.

Lycos shares climbed $15 to over $75 in early trade on the New York markets.