BT had agreed to swap shareholdings with Telefonica last April, as part of a plan to buy MCI Communications, the second-biggest US long-distance telephone company. That plan foundered when WorldCom topped BT's $33.6bn (pounds 21bn) bid last year with a $41.8bn offer for MCI.
Telefonica was to offer BT a bridgehead into the $36bn Latin American telecommunications market, where the Spanish company is the biggest foreign operator with stakes in companies in Argentina, Chile, Peru, Venezuela and Puerto Rico.
Telefonica planned to use the BT/MCI alliance to extend its presence into North America and elsewhere. It is the second time Telefonica has broken off a planned alliance: the first time was with AT&T and Unisource, a joint venture between the dominant phone companies in the Netherlands, Sweden and Switzerland, last year.
Global joint ventures have become pivotal for telephone companies as competition eats into revenues in home markets. Such alliances will ultimately replace state-controlled monopolies, said Deutsche Morgan Grenfell analyst James Golob.
The break in the Anglo-Spanish alliance will push BT to step up competition with Telefonica in the Spanish market later this year. BT owns 15.8 per cent of Airtel SA, Telefonica's rival in selling mobile phone services in Spain.
However, Telefonica's decision to align itself with WorldCom and MCI marks another setback for BT's expansion plans, which put it ahead of other phone companies until last year. While it has established ventures in all major countries in the $160bn European telecommunications market, it now has no real presence outside Europe.