French internet service provider Wanadoo may make a bid for Freeserve, the UK's largest internet service provider, according to a report in the Financial Times.

A takeover would create one of the largest ISPs in Europe.

Freeserve has confirmed that it is in talks with an unnamed bidder, who may make a bid for the company.

Germany's T-Online - owned by Deutsche Telekom had previously been interested in taking over the UK ISP, but talks fell apart earlier this year.

At this early stage, speculation is that any bid will value Freeserve shares at about 175 pence, a premium of about 20% on Tuesday's closing price.

In its statement, Freeserve said: "On the basis of yesterday's share price, it is unlikely that any such offer would be at a substantial premium to Freeserve's share price."

Freeserve shares closed at 146 pence on Tuesday.

At 0840 GMT, shares in Freeserve had risen 10 pence to 156 pence.

Shares in Dixons Group, which owns an 80% stake in Freeserve, were 13 pence higher at 233 pence at 0840 GMT.

However, shares in Wanadoo fell more than 4% to 11.90 euros.

Cash bid

If Wanadoo does buy Freeserve, it will be its biggest acquisition so far.

But Andrew Moffatt, head of interest research at ABN Amro, said:"Our view is this bid level is significantly too low and lacks a cash element which Dixons would want."

He added: "We think Wanadoo is the best partner for Freeserve because France Telecom has one of the leading mobile data operators, Orange, and a 25% share in leading broadband operator NTL."

Freeserve is also understood to be in talks with other companies, including Energis.

In September, Freeserve reported that its losses had doubled, as it was hit by problems caused by heavy demand for unmetered users.