Electrical retail giant Dixons has held informal talks exploring options to link Freeserve, its internet subsidiary, with World Online, the Dutch company which last week announced a £3.4 billion merger with Italian rival Tiscali.

The fact that Dixons and World Online have held exploratory discussions in recent months heightens expectations that Freeserve may end up part of the combined company. Another option would involve swapping equity stakes. A City source said: 'It would be naïve to think the two companies haven't talked. When World Online announced it was talking to Tiscali, it said it was also talking to several other companies.'

It is understood that nothing came of the talks, but further discussions are considered likely. However, the source suggested any deal would not be imminent: 'The Tiscali-World Online merger will take time to go through. They won't finish due diligence until December.'

The World Online-Tiscali deal is seen as a watershed deal which will prompt further consolidation in the internet access sector. The combined company will have a network of internet service providers spanning 15 countries and will be the market leader in Belgium, the Czech Republic, Denmark, Italy and the Netherlands.

The company will have 6.1 million internet subscribers; Deutsche Telekom's T-Online ISP has just 3.5 million. The new company will also have a £1bn cash pile to help finance further acquisitions.

However, T-Online has a market capitalisation of around £7.5bn, and analysts believe it is in a strong position to consolidate its position in the market place.

The German firm held takeover talks with Freeserve earlier this year, but the deal fell through after the two sides failed to agree a price. Analysts are speculating that the Tiscali-World Online deal will put greater pressure on Freeserve to find a partner.

The Tiscali deal closes a chapter on one of the internet sector's most controversial companies. World Online's share price haemorrhaged after it floated in March.

At one stage earlier this year World Online was valued at more than £35bn. But investors panicked when they discovered that the company's founder and chairwoman, Nina Brink, had sold most of her shareholding before the company floated.