The European Commission has launched a formal investigation into a 9bn euros (�5.9bn; $9.7bn) advance to France Telecom by the French government in December.

"The Commission decided today to launch a formal investigation into the granting to France Telecom, via a public institution, of a shareholder's advance in the form of a maximum credit line of 9bn euros to cover its debts," the Commission said in a statement.

The government and France Telecom have both denied the bail-out was state aid.

"France Telecom believes that, as majority shareholder, the French State's participation in the company's action plan is no different to that of a private investor and does not contain any element of state aid," the company said in a statement.

The investigation will also determine if a special tax arrangement in operation until the end of 2002 constituted state aid.

Debt deal

No notification of the arrangement was given by the French to Brussels, which is responsible for regulating state aid within the 15-member bloc.

France offered the credit to the troubled telecoms firm, through a shell company called ERAP, to help cut its 70bn euro debt almost in half by 2005.

The government's 56% stake in the France Telecom was to be transferred to ERAP as part of the deal.

France Telecom ran up the debt through an acquisition spree and by bidding for third generation mobile licences during 1990s telecoms boom.

On Wednesday, France Telecom said it had sufficient cash to meet its debt payments this year as it reported an 8% increase in revenues last year.