BT is close to announcing exclusive talks to acquire EE, Britain's largest mobile group.
EE was formed only five years ago from the merger of Deutsche Telekom's T-Mobile and the UK operations of France's Orange.
A deal would see BT pay as much as £12bn in cash and shares for EE - in what would be the largest deal struck by the former state-owned British telecoms incumbent – to make a remarkable return to the mainstream consumer mobile market after it was forced to spin off O2 in 2001.
The FT's Daniel Thomas and Arash Massoudi report that according to people familiar with the matter, BT could announce its decision later this afternoon.
But these people cautioned that Telefónica could still disrupt the talks with a counter offer to sell O2 at a more attractive price.
The combination of the country's largest fixed-line and wireless networks would create a dominant telecoms and TV group in the UK, returning BT to a leading position in the provision of broadband and mobile contracts.
The decision follows several days of intense negotiations between the three parties, according to people familiar with the matter. All parties declined to comment.
BT has overseen an unusual "reverse auction" in recent weeks as the owners of O2 and EE have battled to sell their businesses to the British telecoms group.