BT Ireland chief executive Danny McLaughlin said the proposal was a good one "in principle". "It's good provided that all of the mechanisms are in place to ensure effective competition, " he said.

In an interview with the Wall Street Journal Europe on Friday Robert Topfer, the Babcock executive who led the private equity group's takeover of Eircom, confirmed that it is pressing ahead with plans to split the company in two.

The move would see Babcock exit the retail telephone and internet business. Eircom would then, effectively, be a utility company renting out access to its telecoms network to third parties.

In theory such a move could resolve the dispute between Eircom and other telecoms providers, such as Smart, Magnet and BT, over the right to access its network. Without the need to protect its own retail arm Eircom could effectively level the playing field. "We share but we share begrudgingly, " Topfer said of the current situation. He described the proposal to split the company as "nirvana" for the communications regulator Comreg.

McLaughlin said, however, that if even if Eircom were to exit the retail business there would be a need for "a strong and empowered regulator" to ensure effective competition. If not, he said, the risk was that splitting up Eircom would simply create "two monopolies out of one".

According to a report by Bear Stearns analyst Jonathan Dunn, meanwhile, Babcock's move could be the precursor to a series of similar steps by telecoms companies around Europe. Dunn estimates that telcos such as Deutsche Telekom, France Telecom and Sweden 's Teliasonera could release over 120bn in capital by separating network assets from their retail businesses.

"The potential separation of retail from wholesale should be a net positive for the European telecoms sector, freeing capital for distribution or re-investment in growth areas, " said Dunn.

Dunn also says that, shorn of their retail commitments, network operators would be attractive to private equity groups such as Babcock which look for the cash-flows and high gearing potential that infrastructurebased utilities such as telecoms networks provide.