Shoppers will be able to pick up a phone with their groceries

Tesco-branded pre-paid phones will be on supermarket shelves by Christmas, the partners said on Wednesday.

Both companies will have equal shares in Tesco Mobile, which will use mmO2's technology and network.

Tesco Mobile also plans to offer contract phones over the internet next year.

The deal follows a similar tie-up announced earlier this year between rival supermarket Sainsbury's and high street mobile phone chain Carphone Warehouse.

Two million customers

Tesco's chief executive Sir Terry Leahy said: "The service will be convenient. You'll be able to buy handsets instore or over the internet and the charges will be simple and clear.

"MmO2 is a good partner for Tesco. They have a strong management team and we work well together."

Both companies will invest �8m ($13m) in the first two years of the joint venture, which they hope will attract up to two million customers.

Peter Erskine, chief executive of mmO2 said: "The terms of the joint venture create a sound and sustainable business model for both parties.

"MmO2 will make a return both through Tesco Mobile's earnings and through the more efficient use of our network capacity. We anticipate no material impact in the current financial year but positive returns in the future."

Shares in Tesco fell 1.25p at 214.25p while mmO2 slipped 0.25p to 63p in early trading.