The French government is thought to be on the verge of dropping plans to issue a fourth 3G licence, claiming that a successful bidder would stand little chance of making a network financially viable, according to a report by Dow Jones.

The report claims that the French telecoms regulator Arcep rejected an application for the licence made by Iliad subsidiary Free Mobile in October, as it did not meet the financial criteria. Iliad was reported as wanting a reduction or step payment of the €619 million licence fee.

Following the collapse of the process, French Finance Minister Christine Lagarde said all options remained open for the future award of the country’s fourth and last 3G mobile licence. Commenting on this move, a government official told Dow Jones that, instead of an auction for a fourth mobile licence, “we could make a deal with the current mobile phone operators” which would make a fourth licence unnecessary, though no further elaboration on quite what this meant was forthcoming.

However, observers believe that the French government, given its widening budget deficit and mounting debt, will want to earn the revenue from issuing the fourth licence. Under EU law, the proceeds of the sale of a communications licence can go straight into the public purse.

Shares prices in France’s existing 3G licence holders – Bouygues, France Telecom (Orange) and Vivendi (co-owner of SFR), all strengthened on the news as worries of a potential pricing war dissipated.