Outside Europe, the firm has 20 million customers in Brazil

Telefonica and a number of Italian finance firms will acquire an 18% stake in Olimpia, Telecom Italia's parent firm, from tyre company Pirelli.

Telecom Italia's share ownership structure means the deal will give the group control over key decisions.

Italian politicians had called for the firm to remain in Italian hands.

Foreign hostility

US telecoms giant AT&T abandoned a joint bid with Mexico's America Movil earlier this month, amid growing hostility in Italy to a foreign takeover.

Prime Minister Romano Prodi was among those who urged a domestic bidder to come forward.

Telefonica's partners include banking groups Mediobanca and Intesa Sanpaolo and insurance business Generali Assicurazioni.

Between them, Intesa and General Assicurazioni already own 5.6% of Olimpia's shares.

The Benetton family has also agreed to sell its 20% stake in Olimpia, although it will remain a member of the controlling consortium.

The deal, which must be approved by the competition authorities, is expected to be completed by October.

Telecom Italia is one of Europe's largest telecoms providers, with about 24 million fixed-line customers in Italy and 32 million mobile users.