Telefonica SA (TEF) said Sunday it has reached an agreement to deepen its strategic alliance with China Unicom (Hong Kong) Ltd. (CHU), giving Spain's largest telecommunications operator by market value a stronger foothold in the world's largest mobile telephony market.

In a statement, Telefonica said it will increase its stake in China Unicom to 8.06%, from 5.38% previously, and that China Unicom will purchase shares equal to between 0.885% and 0.892% of Telefonica.

The two companies will spend $1 billion each on the share purchases.

In addition, they will cooperate in various areas including research & development, joint purchasing of equipment and joint service provision to multinational customers, Telefonica said.

"We are delighted with this alliance, which will bolster both of our companies' leadership positions, giving us a combined global customer base of nearly 550 million," Telefonica Chairman Cesar Alierta said in the statement.

Telefonica had a 9.9% stake in China Netcom Group Corp. (Hong Kong) Ltd. before this company was taken over by China Unicom earlier this year.

Telefonica's bet on China represents its biggest investment outside its core markets of Europe and Latin America. It has 264 million customers in 25 countries around the world. China Unicom has 141 mobile telephony customers in China.

-By Jonathan House, Dow Jones Newswires; +34 619 93 39 52; jonathan.house@dowjones.com