The relationship between Australian carrier Telstra and the government is on increasingly shaky ground as the incumbent operator Thursday reported a 26.2 per cent drop in profits.

For the year to end June 30, profit at the carrier dropped 26.2 per cent to A$3.18bn (£1.28bn) from A$4.3bn in 2005, hit by redundancy and restructuring costs and decline in traditional telephone services.

Revenues however increased 2.6 per cent to A$22.83bn for the year to end June 30, up from A$22.26bn in 2005. This was largely impacted by an increase in mobile revenues which climbed 6.1 per cent to A$4.9bn.

Despite some reports suggesting that members of the government are asking for Sol Trujillo’s head, the chief executive said today he believes Telstra “is on track with its transformation”.

In a letter to shareholders, Trujillo said “the transformation to the New Telstra requires us to take tough medicine throughout our business for a while yet but we are on track”.

However, the Telstra chief also acknowledged the growing rift between the telco and the regulatory authorities. Trujillo once again took the opportunity to blast the competition commission for “mandating competitors’ below cost access to our fixed line network”. Arguments over pricing have become the biggest threat to the government’s 51.8 per cent stake sale of Telstra, pencilled in for later this year.

Pricing was the bone of contention earlier this week when Telstra abandoned its A$4bn fibre network after a dispute with the competition regulator. The state run operator scrapped the project after reportedly failing to reach an agreement on how much it would charge rivals to access the high speed network.

With the Australian government putting increasing pressure on Telstra to iron out its regulatory wrinkles, this latest move puts the A$32bn privatisation of the company in further doubt.