KPN is heavily focused on the mobile market

KPN's interest in the smaller Belgian firm, which is controlled by Singapore Telecommunications and US carrier SBC Communications, was to bolster its financial stability.

KPN built up its towering debts after spending heavily on third-generation (3G) mobile phone licences in the Netherlands and Germany.

It also has a minority stake in the group that is building the UK's fifth mobile phone network after acquiring a 3G licence last year for �4.38bn.

Belgacom, meanwhile, saw KPN as a rapid way of gaining access to a Europe-wide telecoms network, with particular strength in mobile phones.

Although the strategic logic was strong, the deal was imperilled by KPN's plummeting shares, which have heavily underperformed their European peer group.

With its current share price, KPN would only have controlled 40% of the merged group, despite being a far larger company.

Shares in Belgacom barely budged on the news, indicating that investors thought the deal would have been solely to the benefit of the Dutch company.

Cash crunch

The Dutch state, which controls just over one-third of KPN's equity, may have to help the firm meet the 5bn-7bn euros in repayments it faces next year.

In the longer term, the company may have to sell off some of its assets, in particular the various stakes it holds in international operations.

During the late 1990s, KPN was one of Europe's more acquisitive telecoms firms, and now serves 25 million customers worldwide.

In July, the firm agreed to sell its 44% stake in Hungary's Pannon GSM mobile phone operator to Norway's Telenor.