A spokeswoman for Veba confirmed that the group was looking for "a new international partner" in Vebacom and may buy out C&W's 45 per cent stake in the venture.
In a separate announcement C&W admitted it was discussing the future of its partnerships in Germany and the rest of Europe. "The discussions are continuing and a more detailed statement will be made in due course," a spokesman said.
Confirmation of the breakdown lifted C&W's shares by 15p to 479p, as investors breathed a sigh of relief that a potentially huge drain on the group's cash reserves could be over.
However, Veba discounted the idea that it was about to sell its 10.4 per cent stake in C&W, bought in December 1994 when Vebacom was formed, now worth pounds 1.1bn. "C&W like to do things in phases and selling that stake would cause a lot of turbulence," said one observer.
Earlier, more details had emerged of the rift between C&W, Veba and RWE, another German utility, which last October stunned observers by joining the Vebacom alliance.
RWE had previously been a partner in British Telecom's German alliance with Viag, the diversified industrial giant.
Separately yesterday BT and Viag said they had won the fourth digital mobile phone licence on offer from the German Government.
Senior sources close to C&W suggested that Vebacom, a relic of the Lord Young era at the group, had become an increasing liability as Dick Brown, the American who took over as chief executive last summer, sought to carve out a clearer European strategy. He has asked executives to judge each joint venture on the basis of whether it adds value to C&W's dominant European subsidiary, Mercury. "What C&W does in Europe must benefit Mercury," said a source.
The "Brown doctrine" explains the recent frosty relations between the English and German sides in the partnership. RWE and C&W had yet to sign contracts to extend Vebacom, which would have seen C&W's share in the venture drop from 45 to 25 per cent.
There had been disagreements over the precise wording of the various agreement documents, drawn up in German and English.
A more fundamental rift was over RWE's insistence that it invest at least DM8bn (pounds 3bn) over the next five years in a fixed phone network. BT's earlier relationship with RWE had fallen apart in considerable bitterness over exactly the same issue. BT is thought to have been furious that RWE had apparently been privately negotiating to join Vebacom at the same time as developing the Viag alliance.
RWE's ambitions meant C&W faced the prospect of shouldering its share of losses in Vebacom for a long period, at the same time as completing its complex pounds 5bn merger between Mercury and three UK cable companies.