KPN, a 21 per cent shareholder in Eircom, and Belgacom have called off talks on creating a Benelux telecoms group to challenge larger European peers, leaving KPN still searching for a solution to its huge debt problem.

KPN's stock crashed 23 per cent to its lowest level in its history after the news as investors wondered how the leading Dutch telecoms group would avoid its credit rating being cut to below investment grade.

After more than two months of talks - which set out to outline a possible merger of equals - the groups failed to agree on the key issues of valuation and, in particular, the combination of overlapping mobile assets.

"If all other problems were solved, we would have been prepared to accept a valuation ratio under 50 per cent," KPN chief executive Mr Paul Smits.

"There was a specific issue with the integration of our mobile assets that we felt had a material effect on the valuation of the combined company," Smits said.