Spanish telecoms giant Telefónica has offered £17.7bn for O2, potentially creating the second biggest mobile operator in the world after Vodafone.

The cash deal would end months of speculation about the future of O2, formerly BT Cellnet, following the collapse of a Dutch/German bid to buy the company in August.

O2 is the UK's most popular operator but has few customers in The Netherlands and Germany, making it ideal for a firm looking to buy into the domestic UK market.

Telefónica, previously the sixth largest mobile operator, has a strong customer base in Spain and Latin America, but has few customers in Northern Europe.

Under the terms of the proposed deal O2 would be integrated but would retain the current branding and contract terms.

"There is a second reason for Telefónica wanting this deal," said Marta Muñoz Méndez-Villamil, senior analyst at Ovum.

"The UK and Germany are two of the most advanced markets in Europe. O2 has managed to defend its position well while operating in highly-competitive environments, something Telefónica could learn from, especially now that it faces increasing competition from Vodafone and Orange in its home market."

O2 chief executive Peter Erskine said in an interview on the BBC's Today programme: "This transaction brings together two companies which are growing strongly with highly complementary geographical activities."

Erskine expects shareholders to back the deal, as they will realise a 20 per cent bonus on the price of O2's current market value.

Telefónica already runs i-Mode telephone systems like those launched by O2 in September and is a strong proponent of the High Speed Downlink Packet Access (HSDPA) mobile data standard, which O2 will launch today.

"The trial phase for Telefónica's 3G evolved services using HSDPA, the first to be tested in Spain, is well advanced," said Ignacio Camarero, executive director for operations at Telefónica.

The two companies expect to see savings of £198.8m over the next three years as a result of the merger.