Vodafone Greece and WIND Hellas are set to call-off their planned merger in Greece in the face of regulatory opposition, according to sources at the Financial Times.

Reports last week in the local media had suggested that a tie-up between the country’s second- and third- largest networks was imminent, with a non-cash deal expected to create a EUR1 billion firm that would be 60 percent owned by UK-based Vodafone. However, a source said that Vodafone has failed to agree a deal with Largo Limited, WIND Hellas’ private-equity owners, that would satisfy regulators.

According to the latest Wireless Intelligence estimates, Vodafone is the second-largest operator in Greece on 4.2 million connections in Q4 2011, while WIND Hellas is third on 3.5 million. But even though a combination of the two would still be smaller than market leader Cosmote, which has 8 million connections, regulators are thought to be against turning the market into a duopoly.

According to the Financial Times, people with knowledge of the talks said that the two companies could carry on talks to share networks, which is more likely to be permitted by European regulators, and would still allow some cost savings. Vodafone and WIND Hellas declined to comment.

The two operators are both suffering amid the country’s economic crisis. WIND Hellas was previously owned by Weather Investments, but was sold in 2010 to creditors in a deal designed to pay-off the operator’s EUR1.3 billion debts. Meanwhile, Vodafone took a £450 million impairment loss on its Greek unit last quarter.