AT&T announced Monday that it was pulling out of its proposed purchase of Telecom Italia (TI) which has faced strong opposition from the country’s centre-left government.

The American telecoms giant was hoping to buy a stake in Olimpia which controls TI but Pirelli, which owns Olimpia, said AT&T had withdrawn from the purchase citing possible “regulatory difficulties”.

AT&T ended negotiations Monday afternoon leaving its Mexican partner, America Movil, still in the running. Tyre giant, Pirelli which owns Olimpia, said Movil and another Mexican firm, Telefonos de Mexico, were still considering the buy.

Pirelli also said it would continue to explore options in its quest to sell its 80 per cent stake in Olimpia.

Italian prime minister Romano Prodi made it clear from the start that he wanted TI to remain in Italian hands. On Monday he may have been granted his wish as Italy’s largest bank by assets, Intesa San Paolo, signalled it was interested in taking a stake.

On Tuesday morning, Reuters quoted Prodi on a trip in Japan saying, “it seems to me clear that Telecom Italia should remain in Italian hands and I believe that overall perhaps a grouping of European interests could be a positive element in having more influence in the future decision process.”

And European firms are interested. The investment bank, Mediobanca, is reportedly working on a deal which has been linked to Spain’s Telefonica. France Telecom is also known to be circling. Last week Telecoms.com reported that the French giant had hired Morgan Stanley as adviser for a potential purchase of TI.

Mike Cansfield, Telecoms Strategy Practice Leader at analyst Ovum, said: “Concern in the Italian government about foreign ownership of what it sees as strategic national assets is the cause of the breakdown. Not unreasonably AT&T sees this proposed investment as too risky, so it has withdrawn. Interestingly America Movil has not [yet] followed suit, although it would be a surprise to us if this did not happen.

“Selling a stake in the company was a means to act as a counterweight to political interference. But as this exercise has shown, a stake in the company is no insurance against political realities of business [and politics] in Italy.”

The future of TI has been in doubt for some time and feelings were running high Monday. At one point a protester, Beppe Grillo, who is an Italian comedian, managed to push his way to within shouting distance of the TI board. Claiming to represent 4,000 minor shareholders he accused TI’s board of stripping the company of billions of Euros and tens of thousands of jobs.

“Hand in your resignations. It is a service that you can do for your country,” Grillo shouted at the board. TI’s Shareholders have lost half of their investment since Olimpia took over Telecom Italia in 2001.