Eircom shares fell by 5 per cent to €2.47 yesterday, dragged down by an even larger fall in the value of Vodafone, which is in the process of buying Eircell.

Shares in the international mobile giant were down 6.83 per cent at £2.25 sterling (€3.57) in London after an across-the-board slide in US telecoms companies on Tuesday night. There were fears that many investors may want to offload Vodafone stock. Last night's rally on Wall Street came too late for European markets. Shares in Vodafone finished up in London at just 5p sterling above the £2.20 sterling level at which Eircom can walk away from the Eircell deal without incurring any costs.

Sources said last night that although £2.20 sterling represented a psychologically important level, any decision not to proceed with the Eircell deal would be based on a longer-term view of the Vodafone share price. Vodafone is paying for Eircell with its own shares and Eircom shareholders will get 0.9476 of a Vodafone share in respect of every two Eircom shares that they hold. Eircell accounts for two-thirds of the value of Eircom and, as a result, the value of shares in the Irish group will rise and fall in line with Vodafone shares until the sale is completed in March.

Based on last night's Vodafone closing price in London and the sterling exchange rate, the cash value of the deal is €1.85. The remainder of Eircom's business is valued at just 62 cents on the basis of Eircom's share price. Fears of a downturn in the US economy forced down the prices of telecommunications companies in the US, which fed through to Vodafone, according to Mr Mark Lambert, a telecoms analysts with Merrill Lynch.

Last night's cut in US interest rates came too late to have an impact on European stock exchanges but sparked a rally in the US markets. Vodafone is also quoted on the US stock market and had bounced back from its European lows by mid-session on Wall Street.

The gains are expected to be reflected in the share price when European markets reopen this morning and will feed through into Eircom.

Despite last night's rally on Wall Street, Vodafone shares are still close to their 18-month low and are being held back by a perceived overhang of stock.

Vodafone's active acquisition programme has resulted in its stock being held by a number of other telecoms companies that are now looking to sell and also many small shareholders.

The Eircell deal, which goes through in March will create another 450,000 small Vodafone shareholders, many of whom will look to sell in order to recoup some of the money they invested in Eircom when it floated in 1999.