(Telecompaper) Telefonica is in talks to sell its O2 mobile operations in the UK to BT in exchange for a 20 percent stake in BT, according to various unnamed Telefonica sources cited in Spanish website El Confidencial. The deal would be part of a "strategic alliance" to create a giant European operator able to compete with AT&T, should the US company complete its proposed acquisition of a major European operator. The report adds that the talks between Telefonica and BT are at an "advanced" stage, but no final deal has been reached. Last week Telefonica COO Jose Maria Alvarez-Pallete said at a Morgan Stanley conference in Barcelona that the company was leaving all its options open, including the sale of O2, if the UK were to evolve toward a convergent market in the future, with customers signing up in increasing numbers for fixed-line, mobile and TV services.