France Telecom's mobile phone subsidiary, Orange, is in talks with E-Plus, the third largest mobile phone company in Germany, according to a report in the Sunday Telegraph.

E-Plus's owners, KPN of the Netherlands and BellSouth of the US, are believed to be keen to sell.

So the talks, which are initially focusing on creating an alliance, could end in an outright acquisition, insiders told the newspaper.

The alliance talks focus on creating firm links between E-Plus and MobilCom, the German telecoms group in which both Orange and its parent France Telecom have a stake each.

One City analyst told the newspaper that Orange is in a position to lead consolidation in the German telecoms market.

Market share

Earlier this month, Orange formed an alliance with the number one cable operator in the UK, NTL.

France Telecom already had a 25% stake in NTL.

Last July Orange struck a similar deal with the fixed-line operator Energis.

Orange's chief executive is said to favour deals with other companies to increase the company's market share.

Stock market listing

France Telecom floated part of Orange in February this year.

After initial blips, Orange shares are now trading above the 9.5 euros (610p) a share paid by retail investors.

Earl this month, the company reported a 33% rise in first-quarter sales to 3.41bn euros ($3.06bn; �2.13bn).

It has also gained 2.6 million new customers worldwide, closing the gap on BT Cellnet as Britain's second biggest mobile group after market leader Vodafone.