The Olivetti board meets tomorrow afternoon in Milan to discuss final details of the bid, which would almost certainly require the disposal of the group's existing telecoms interests to Mannesmann, its German partner. It is being advised by Merrill Lynch, Donaldson Lufkin Jenrette and Italian merchant bank Mediobanca.
The move, if successful, would be a significant coup for Olivetti, which has undergone a dramatic transformation in the past five years from ailing computer giant to a go-go telecommunications company under the stewardship of Roberto Colanino.
Olivetti, which had repeatedly denied interest in its rival, confirmed plans for an extraordinary Sunday board meeting to discuss the offer in a statement prompted by the Italian stock market regulator, Consob, following a 3 per cent rise in Olivetti shares on Thursday.
After the close of trading yesterday, Olivetti put out a further statement confirming that the subject of the board meeting was "a strategic and financial operation" and that the operation concerned Telecom Italia.
Stock market suspicions were further aroused by the decision to release 1998 figures for Omnitel, Olivetti's cellular operation, before the market opened - highly unusual in Italy. The shares rocketed another 5 per cent yesterday.
Consob officials say they are investigating stock price movements in Telecom Italia and looking into previous denials by Olivetti of interest in making a move on the company.
In November Mr Colanino, with the help of a group of Italian entrepreneurs, built up a 13 per cent stake in Olivetti. The company has been largely owned by UK-based investors since a group recapitalisation in 1995, when it pulled out of computers and refocused on telecoms.
Given the huge disparity in size - Telecom Italia is seven times as big - the deal would in effect be a reverse takeover. However, Olivetti has been a far superior performer in stock market terms and has had little difficulty putting in place the necessary bank finance.
Until the appointment in November of a new chief executive - Franco Bernabe, former head of Italian oil group ENI - Telecom Italia had seen its shares slump by 35 per cent.
The bid's success depends crucially on the approval of the government, which is looking to sell its residual 3.4 per cent stake but has retained a golden share. Olivetti is believed to be banking on the government's desire to prevent a major national asset falling into foreign hands.
Also critical is the view of the Agnelli family, which together with a group of banks and insurers holds a pivotal 8 per cent of Telecom Italia.
Olivetti controls Europe's second-largest cellular phone network, Omnitel Pronto Italia, and the fixed-line company Infostrada through a company, Oliman, which is 49.9 per cent owned by Mannesmann, the German mobile phone operator.
There was also talk that Telecom Italia Mobile, Telecom Italia's cellular network, might be sold off by Olivetti to refinance the deal. British Telecom has already been mooted as a possible buyer.
Italy's prime minister, Massimo D'Alema said yesterday: "A group of Italian entrepreneurs, Omnitel-Infostrada, may be biting off more than they can chew." He added: "This will be evaluated but as of now I'd like to express my appreciation of their courage." He described the government's position on a bid as "neutral."