T-Online chief executive Wolfgang Keuntje said the company was in talks with mobile phone operator One2One about launching internet services in the UK.
The comments sent Freeserve shares into a tailspin. They closed more than 6% lower on Thursday at 452p. Its majority owner Dixons fell 8.55%.
"We could surely work together with One2One. We are talking with One2One about whether we can offer an internet access service but there is no timeframe," Mr Keuntje said.
He declined to comment on rumours that T-Online was a frontrunner to take over Freeserve.
Nor could he estimate the value of Freeserve because "we have not studied the company in detail. If we are interested, then we will study the company."
However, he confirmed that the firm was actively looking at expansion.
The German telecom giant has a $94bn acquisition warchest.
"The question is whether you want to pay billions or several hundred millions for an acquisition or whether it is cheaper to set up a business from ground zero," he said.
Mr Keuntje said launching an ISP with One2One would have the advantage of accessing its customer base and sales network.
Tactics
Some analysts said Mr Keuntje might simply be talking down expectations of a T-Online bid for Freeserve as a negotiating tactic.
If it was, then it seemed to have worked, with investors seeing it as a signal to Dixons that it would not bid for Freeserve at the current market price.
"The way the market's reading it is that T-Online are saying that they are not going to overpay, and that they have other ways of getting in to the market," said a leading technology analyst at a major German investment bank.
Others said T-Online may prefer to launch its service in connection with a wireless network operator in light of the expected boom in wireless internet.
Other parties
Although T-Online has been rumoured for a long time to be the only company interested in Freeserve, other bidders may include NTL, Seat/Tin.it, Spain's Terra Networks and Tiscali.
"A lot of companies would be interested in Freeserve at the right price. The UK market is very advanced and they all know they have to penetrate here in order to be truly pan-European," said one analyst.
Freeserve was effectively put up for sale when Dixons appointed investment bankers Goldman Sachs to review its holding.
Freeserve has come under threat from the spread of unmetered, flat rate telephone access.
The company derives most of its revenues from a share of the telephone line charges for its services.
The internet industry has been rapidly consolidating following the merger of America Online and Time Warner in January.
In the latest moves, Spain's Terra Networks, a subsidiary of Telefonica, bought US search engine Lycos for $12.5bn (£8.4bn).
France Telecom is preparing to float its internet subsidiary Wanadoo, while Telecom Italia has just merged its internet service with its biggest rival.