Shares in Cable & Wireless Communications (CWC), the UK cable operator, shot up in early trading on the London stock market in the light of Microsoft's interest.

Microsoft is reported to be seeking to take a 30% stake in CWC.

CWC is also currently holding merger talks with rival Telewest Communications.

Mr Wallace declined to comment directly on the UK cable talks but said: "We do continually talk to Microsoft."

Cable conflict

Bill Gates is looking to tune into the cable TV market

The consolidation of the cable industry raises the possibility that one major operator will emerge with the lion's share of the market.

Microsoft appears determined to play an integral part in the industry's restructuring. It raises the intriguing scenario of Bill Gates fighting it out with Rupert Murdoch, the media mogul who's empire includes satellite broadcaster BSkyB, for control of the UK digital television market.

C&W's also announced a sharp fall in profits at its sprawling international telecommunications operations.

Tougher competition and a slump in business in Hong Kong, in the wake of a severe recession, has hit C&W's business.

C&W's underlying pre-tax profits fell 17% to £1.82bn in the year to the end of March.

An ambitious £3bn investment programme, including a substantial investment in the Internet, will also depress the group's earnings further this year.

Times-Are-a-Changin

C&W plans to spend heavily on the Internet

"The current year will be one of transition for Cable & Wireless," said the group's new chief executive Graham Wallace.

"The difficult economic and market conditions in Hong Kong, coupled with our major capital programmes and revenue investments are expected to reduce underlying earnings significantly in the current year."

Mr Wallace has launched a wide-ranging restructuring of the group since his arrival aimed at improving its profitability. He appears to be moving the group away from the consumer market to focus on business customers.

C&W is also considering the sale of its 50% stake in UK mobile phone operator One 2 One.

Mr Wallace said C&W was still considering all options for One-2-One following a flurry of interest from rival communications groups.