In an unusual move, Ian Lang, President of the Board of Trade, said: "The Government has not given any approval in principle to a possible merger between British Telecommunications and Cable & Wireless. Should these two companies propose a merger, then the competition authorities in the UK, in Europe, and in other parts of the world would need to consider the position."
There have been rumours that the Government has encouraged the talks between the two companies and would use its golden share to prevent a counter-bid for C&W. However, Mr Lang added: "It would be inappropriate for the UK Government to prejudge any future decisions by the UK competition authorities."
At the same time Deutsche Telecom dismissed as "pure speculation" reports that it is in the running to buy C&W's Mercury Communications subsidiary if the pounds 35bn merger proceeds. Industry sources say that Deutsche is BT's favoured buyer, but a spokesman for the German group said: "In this industry everyone is talking to everyone."
City analysts have also speculated that Mercury - BT's big UK rival would have to be divested - could be bought by Nynex, the cable company or by AT&T of the US.
BT has consistently refused to comment on its plans other than to confirm that its advisers are in talks with those of C&W.