Mr Juan Villalonga, the man who introduced the words "stock options" into the Spanish language when he issued Telefonica options to himself and a select group of 100 top executives, thereby multiplying his personal fortune, sits on a throne which looks increasingly shaky.

After being appointed chairman of Telefonica, Spain's largest company, four years ago, it looked for a long time as if he could do no wrong.

The Villalonga reign has seen Telefonica expand on both sides of the Atlantic, its shares rocket and the company and its chairman reap millions.

Suddenly, however, his charmed life is beginning to look less rosy and his position is being questioned.

Mr Villalonga (47) became chairman of Telefonica shortly after the privatisation of the company and the election of his old friend, Mr Jose Maria Aznar, at the head of his centre-right government.

The two men - Mr Aznar, a former tax inspector, and Mr Villalonga, a former banker - had been friends since they were classmates at the El Pilar College in Madrid, the traditional breeding ground for many of Spain's most powerful political and business leaders.

Into adulthood, they remained close friends and, when they married, their wives too developed strong ties. Telefonica took its first tentative steps across the Atlantic a decade ago when it acquired 43 per cent in CTC, the Chilean phone company. It has since increased its stake to 86 per cent and has emerged as the pioneer in Spain's economic re-conquest of its former colonies in America.

It now controls more than 20 million fixed lines and 10 million cellular phones, and has more than two million cable television subscribers in nearly every Latin American country. It employs 65,000 people.

After tentative steps to reach agreements with British Telecom and Unisource, the alliance of European operators linked to AT&T, Mr Villalonga announced last week that merger talks were well advanced with Dutch telephone operator KPN.

A merger would have made the joint company the fourth-largest telecommunications company in Europe and ninth in the world. The news sent Telefonica shares soaring 9.23 per cent last Tuesday, the highest rise in its history.

But Telefonica had not tested the water before taking the jump and Mr Villalonga met opposition where he least expected it.

Although Telefonica was formerly a state monopoly, it is now a publicly floated company, but one in which the Spanish government retains a "golden share" or a right to veto investments it decides are not in the nation's interest.

When it emerged that the Dutch government retains 43 per cent of KPN shares, the Spanish government announced it would refuse to back the merger because it would have given a foreign state too large a share in Spain's own telephone company.

Mr Villalonga, who spends more and more of his time in Miami with his mistress, the widow of a leading South American businessman, was unwilling to be present at the negotiations with the Dutch company because of the impending birth of their daughter, who was born last week.

Mr Villalonga has the power to appoint nine members of the 20-strong Telefonica board. The other seats are occupied by representatives of Telefonica's major shareholders, including four members of the BBVA banking group and two from the Catalan savings group, La Caixa.

When the talks finally collapsed last weekend, it emerged that they and three other directors had voted against Mr Villalonga, raising speculation that all was not well at Telefonica.

"Telefonica is a divided house," KPN's executive director Mr Paul Smits told journalists. He said KPN was breaking off negotiations because of the refusal of the Spanish government and of the two powerful banks, BBVA and La Caixa, to approve the merger.

It is obvious that Mr Villalonga's relationship with his old school-friend is no longer as close as it once was. Sources say Mrs Aznar has played a role in this cooling and she remains loyal to her close friend, Mrs Villalonga. It is her influence which has caused the doors of the prime minister's official residence in the Moncloa Palace to be closed to the Telefonica boss.

Now, many are beginning to question his position within the company. If nine out of 20 voted against him last week, they ask, how long will it be before they vote against him on the board of directors?

Separately, Japan's biggest mobile phone company NTT Docomo is to buy a 15 per cent stake in KPN Mobile, the mobile unit of KPN Telecom, for €3 billion.

Analysts say this deal could be a prelude to a joint KPN-Docomo bid for Orange, the UK's third largest mobile phone operator.