Three owner Hutchison Whampoa has entered exclusive talks to buy O2 in a £10 billion deal which would create the UK's largest mobile phone operator.
Spain's Telefonica is hoping to sell O2 to the Hong Kong group after BT spurned the chance to buy the business in favour of EE.
The group said it had entered talks "over a period of several weeks" to buy O2 for £9.25 billion in cash followed by deferred payments of up to £1 billion.
A statement from Telefonica said: "Telefonica has entered into an exclusivity agreement with Hutchison Whampoa in relation to Hutchison's potential acquisition of O2 UK, Telefonica's subsidiary in the United Kingdom, for £10.25bn in cash."
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Chancellor George Osborne says financial support from the European Central Bank is "necessary but not sufficient" to ensure a recovery in the eurozone economy.
Speaking in Davos, Mr Osborne said the "drastic action" taken by the ECB showed the weakness of the European economy compared to the British economy, as he called on governments to ensure they had their public finances "in order".
The Chancellor said Britain supported any measures that would make the European economy stronger.
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An annual Which? consumer survey has ranked large energy suppliers below smaller independent ones for the fourth year running.Read the full story ›
An adver for the Yves Saint Laurent perfume Black Opium has been cleared by the advertising watchdog after claims that it glamourises drugs.Read the full story ›
The latest International Monetary Fund forecast shows that the UK is pulling ahead despite the global economy being downgraded, the Chancellor George Osborne has said.
In a series of tweets he said:
IMF forecast shows that Britain is pulling ahead while the global economy is downgraded. Fastest in G7 in 2014 and growing faster in 2015
There are risks in the global economy and it’s a timely reminder that we must go on working through our #LongTermEconomicPlan to stay ahead
His comments come after the International Monetary Fund predicted that the UK economy will grow by 2.7% this year, but lowered its forecast for global growth.