The deal that is being negotiated would see C&W take a stake in TeleWest, Britain's biggest cable television operator, where US West is an important partner. At the same time, USWest would make a sizeable investment in Mercury, Cable & Wireless's telecommunications arm.
Industry sources said that Cable & Wireless could pay up to pounds 100m for a stake in TeleWest, while US West was interested in taking a 25 per cent stake in Mercury.
Neither company would comment on the talks.
The deal would give a strong boost to Mercury's local telephone services, which depend largely on links with cable television companies.
TeleWest has stakes in 17 franchises that cover 2.9 million homes. Its other partner is TeleCommunications Inc, the largest cable company in the US, which has ambitious plans to take on more franchises in Britain.
Although Mercury already has agreements with cable television companies on local services, relations between the two sides have never been harmonious. Cable companies believe that Mercury's margin for providing the link into the trunk network is too high. Mercury has been concerned that when other trunk operators appear, it will lose many of its cable partners.
Mercury and USWest already have strong links since they decided this year to merge their mobile telephone businesses.
Mercury Personal Communications is to launch a personal communications network jointly with Unitel, which was bought out by USWest.
The mobile telephone service, which will rival cellular networks, is the second important strand in Mercury's plan to increase its presence in local networks.
At the end of last year, Cable & Wireless held talks with AT&T of the US to provide a global telephone service for businesses as part of a deal under which AT&T would have invested in Mercury.
Lord Young, chairman of C&W, has since rejected the idea of global alliances.Reuse content