Eircom is expected to formally reject Mr Denis O'Brien's €2.25 billion offer for its fixed-line business this week. It is understood that Merrill Lynch, which is advising Eircom, will tell Donaldson Lufkin and Jenrette, that, unless Mr O'Brien offers something closer to €2.7 billion, the company will not enter into serious discussions.

The move will bring to an end a three-week phoney war since Mr O'Brien made his opportunistic move on foot of a €5.1 billion offer for Eircom's mobile business from Vodafone.

The rejection comes after an exchange of information between Merrill Lynch and DLJ. Eircom's advisers had initially asked for more information about Mr O'Brien's financial backers. "They will be putting a case to them [DLJ] to show why it is worth more than €2.25 billion," said a source.

Analysts said it was unlikely that Mr O'Brien would raise his offer by the amount Merrill Lynch suggested, but some increase is expected. They also played down the significance of comments made yesterday by the chief executive of Vodafone, Mr Chris Gent, which cast doubt on whether the British group's €5.1 billion takeover of Eircell would go ahead.

After the publication of Vodafone's interim results yesterday, Mr Gent said it was too early to say if the talks would lead to a deal but he expected a decision by the start of December. "We hope it comes to something. It all depends on due diligence," he said.

The market interpreted the comments positively, however, and Eircom shares rose by 10 cents to €3.30. More than 10 million shares changed hands in Dublin and London, most in London. Vodafone shares rose 44.25p to £260.50 sterling on the back of better-than-expected results.

Mr Scot Rankin, telecom's analyst with Davy Stockbrokers in Dublin, cautioned against reading too much into Mr Gent`s remarks which contrasted starkly to the more upbeat noises coming from Eircom sources. Initially they had predicted the deal would be announced last week.

Several factors are contributing to the delays, including the desire of KPN and Telia, the Dutch and Swedish telecoms companies that own 35 per cent of Eircom, to exit as part of the Eircell deal.

If the deal goes ahead, Eircom will have to demerge from Eircell and what is being called "new Eircom" in order to facilitate the deal. Vodafone will then buy Eircell in a straight paper transaction.

The due diligence now underway is to determine what parts of Eircom will be demerged. Although Eircell is a separate company within Eircom, it shares much of its infrastructure with the parent group.

It is understood KPN and Telia have said they do not wish to remain as shareholders in Eircom after the demerger. The company and its advisers are keen to facilitate them as the share price of the restructured company would be dragged down if KPN and Telia remained on as reluctant shareholders looking to sell at the first opportunity.

The solution may lie in the sale of Eircom's fixed-line business to Mr O'Brien or another bidder. If this business is sold to Mr O'Brien, it should provide an exit mechanism for KPN and Telia.

A rival bid from a consortium headed by Dr Tony O'Reilly has yet to materialise.

Dr O'Reilly is chairman of Independent News & Media and also the company's largest shareholder.