In a statement released on Tuesday, Orange said it had "renewed preliminary discussions" with the Bouygues group but stressed they were not bound to any timeframe nor committed to "any particular pre-defined outcome."

Market leader in France and 20-percent owned by the state, the Paris-based fixed-line and mobile operator also said it was exploring "the opportunities available within the French telecoms market, while keeping in mind that its investments and its solid position afford it a total independence in its approach."

In this effort, it would be "particularly vigilant" to create value with this project, Orange added.

In a separate statement, Bouygues said "a confidentiality agreement" had been signed Tuesday by the two groups, and that there was "no guarantee for an outcome to the preliminary discussions."

The industrial and construction company headed by Martin Bouygues also said it would "attach decisive importance" in all its discussions to "the interests of Bouygues Telecom employees and to investment momentum within the sector, which must remain strong in the interests of the consumer."

Controversial market consolidation

In recent weeks, speculation has been rife in French media that the two telecoms groups are in talks on a possible tie-up which would reduce the number of France's operators from four to three. The merged company would represent more than 60 percent of the mobile market, facing competition from smaller operators SFR and Free.

A leading French consumer advocacy group, UFC-Que Choisir, however, demanded safeguards to ensure that a merger would not translate into less competition and higher prices for mobile phone users. The French government would need to "take a clear stance concerning its will to ensure real competition in the French electronic communications market with the aim of increasing consumers' purchasing power," the group said in a statement Tuesday.

The government in Paris declined to comment. But the Economy Ministry said last month that minister Emmanuel Macron had no "principled position" on the number of operators in the market, as long as investments in fixed line and mobile services are safeguarded - a policy U-turn from Macron's stance last June when he said consolidation was undesirable for the sector.

Stocks rise despite regulators' concerns

News of the talks went down well with investors on the Paris stock exchange on Tuesday, where telecom shares rose on the prospect of further market consolidation that could help reduce pressure on prices.

Shares in Bouygues were up 1.4 percent and Orange rose 1.5 percent. HPC trader Xavier de Villepion told the news agency AFP that French telecoms would "gain from the fact there is one less player and therefore one less competitor."

Any merger between the two French telecoms operators would require the green light from competition authorities in both France and Brussels.

Telecommunications consultant Stephane Dubreuil told AFP has said he believed the French government would support the deal, but that it could prove difficult to win over the European Commission, and that compensatory moves would be demanded in return.

Analysts said Orange would probably need to sell assets worth around five billion euros ($5.4 billion) to meet regulatory concerns over any tie-up.

Competition authorities in Brussels have taken a tougher line in recent months, favoring moves towards international consolidation over mergers between national operators.

uhe/nz (AFP, Reuters, dpa)