LONDON -- The European Union's decision to liberalize the telephone business will unleash a new round of mergers, takeovers and deal-making as companies jostle to protect their markets and attack new ones.


The move to abolish monopolies in most state telephone networks of the European Union by 1998, agreed last week, will also bring lower prices for business and consumers in this $130 billion-a-year market.


This means that Europe's biggest companies will be progressively freed from a high-cost burden which has put them at a severe disadvantage when competing with their counterparts from the United States and Japan.


And it will remove some potential roadblocks to European participation in the so-called information superhighway, where computers will increasingly orchestrate communications, education and entertainment to businesses and homes along telephone lines.


"There will be another huge round of alliance-building over the next three years as companies prepare for the freeing-up of markets," said Sean Phelan, principal analyst with the Yankee Group Europe, a global telecommunications and information technology consultancy.


Some state-owned European monopoly companies have already set up alliances like Unisource, which groups Dutch, Swedish and Swiss PTTs with Spain's Telefonica. Deutsche Telekom and France Telecom formed Atlas earlier this year.


Big international players like British Telecommunications, which has grown lean and competitive in the relatively free U.K. market, and AT&T of the U.S. are said to be on the prowl for suitable deals. Companies like Telstra Corp. of Australia and U.S. regional telephone providers like NYNEX Corp. are on analysts' lists of possible players.


"BT is the most obvious example of a company looking around with a predatory glint in its eye," says John Matthews, principal consultant at Ovum.


The breaking up of monopolies across mainland Europe will also mean lower prices and remove a heavy burden borne by European companies. Analysts say companies like Italian giant Fiat's car subsidiary would cut its telecommunications costs of about $120 million a year by around 20 percent if it operated in the free markets of the United States.


And they say this burden has hit all big European companies that operate internationally.


"Telecommunications are ludicrously expensive in Europe today," said the Yankee Group's Phelan. A recent study by Yankee showed that leased telephone lines were twice as expensive in Germany as they were in France, and almost seven times more expensive than in the United States.


Costs in liberated Britain, though, have been much lower as competition forced prices down. This has led to companies that operate in high-cost countries like Spain and France diverting telecommunications traffic bound for say, the Americas, to operators like BT or AT&T in Britain, which can then shift the traffic over their cheaper lines. Some analysts say the big telecommunications cost advantage has been a major factor in international companies deciding to locate in Britain, rather than mainland Europe.


The EU's decision will gradually put an end to this U.K. advantage, but it will also open up Europe's state phone monopolies to competition. "Companies like BT and AT&T can go directly for the huge data communications market for international corporations in Europe," says Ronnie Dallal, managing consultant at BIS Strategic decisions.


He said currently state monopolies can erect bureaucratic obstacles to entry by predator companies, but that this will end when markets are freed. "Soon companies will be able to go to Frankfurt or Paris, create an infrastructure, and then target customers," says Dallal.


As well as seeking alliances with other companies, determined European entrants into the telephone market will also seek to organize alliances with electric-utility companies, railways, canal operators, and motorway networks, because these companies own valuable conduits into cities and towns.


These will be prime assets for companies seeking to lay down fiber-optic cable networks, which have the capacity to run two-way or interactive television and are the essential precursors to the information superhighway.


"The winners will be those companies that can get a fiber infrastructure in place, or that can roll out their plans quickly." says Phelan. "The long-term conclusion: This is the most encouraging sign seen for a long time to build information superhighways in Europe."