The proposed merger between state-owned telecommunications groups Telenor of Norway and Telia of Sweden, who both have interests in Ireland, collapsed dramatically yesterday.

The Swedish Industry Minister, Mr Anders Sundstroem, said yesterday that it had been abandoned due to disagreements. "We have registered the lack of a common basis for negotiations over a merger between the two companies," Mr Sundstroem said.

Telia wanted to create a new and fully-integrated company, operating on commercial principles, with a joint management and merger of the staff. "An agreement on these principles could not be reached," he added.

Telenor is a 45 per cent shareholder in Esat Digifone, the second mobile phone operator. Telia owns 8 per cent of Telecom, with an option to increase its stake. Telia is involved in Eircell, the state mobile phone operator, through its Telecom connection.

Industry sources maintained this week that, if the merger went ahead, either Telia or Telenor would have had to sell their stake. Telenor was touted as the most likely, but the company issued an adamant denial on Thursday, saying it was fully committed to Digifone.

In a statement yesterday, Mr Lars Berg, Telia's chief executive, said it regretted that the discussion had ended. He said both companies had considerable commercial and technical strengths and a merger would have led to the creation of a company that would have held a potentially strong position in the market place. "It is, however, an advantage that the process to merge our operations was terminated at a relatively early stage without harming either company," he said.

The merger hit difficulties last month, when it become apparent on the Norwegian side that there was opposition to the proposal from of the three parties in government. However, it was thought that this had been overcome and the merger process had been due to advance very quickly this weekend.

Last night a spokesman for Telecom said the relationship between Telecom and Telia had been "exceptionally strong" since the alliance was formed. "It was never at issue during the discussions," he said. "The alliance will continue to be enhanced as we strengthen TE's position in the marketplace."