TELECOM Eireann has begun discussions with potential strategic alliance partners, with two consortiums, British Telecom/ MCI and KPN/Telia, now emerging as the clear favourites.

Tele Danmark and the US company Bell Atlantic are also still in the race, but it is understood that another US company, GTE, and Singapore Telecom have both dropped out of the negotiations.

Following the circulation of the information memorandum approved by the Government last month, Telecom Eireann has had outline discussions with those interested in forming an alliance.

This has narrowed the field, with Singapore Telecom and GTE, a US operator based in Stamford, Connecticut, both of which had been seen as rank outsiders, deciding not to pursue the matter any further.

Airtouch from California is still interested in forming an alliance with Eircell, Telecom's mobile phone operator, but it may only succeed in doing do so by linking up with one of the other consortiums.

This is because whichever company is Telecom's main strategic alliance partner it is almost certain to want to have Eircell included in the package into which it buys.

The choice for Telecom now appears to rest between a consortium including British Telecom and its US partner MCI, and one including KPN from the Netherlands and Telia of Sweden, both members of the larger Unisource consortium.

Tele Dan mark also remains interested, despite being part of the consortium which has just bought almost 50 per cent of the Belgian operator, Belgacom. Telecom Eireann's latest discussions with potential partners have concerned the information memorandum with potential partners. The next and crucial stage will involve detailed discussions on the terms of the deal. The Government has said it hopes to have a deal concluded by late summer. The Government expects to raise between £400 million and £500 million from the sale of a 35 per cent stake in Telecom Eireann. Some £220 million of the proceeds will go to the company, while the remainder will mainly be used to offset the out standing Exchequer liability to the Telecom pension fund.

However, it is not clear whether a suggestion from British Telecom - that part of the consideration be in cash and part in BT shares - will be pursued in formal talks.

A further 5 per cent stake is being reserved for the Telecom staff, although yesterday Mr David Begg, of the Communication Workers Union, said this should be increased to 10 per cent.