Deutsche Telekom AG (DT) and France Telecom (FTE) will merge their U.K. operations to form the country's largest mobile phone operator, toppling current market leader Telefonica's (TEF) O2 from top spot, people familiar with the matter told Dow Jones Newswires Monday.

The deal is expected to be signed Monday and announced Tuesday, before market open, the people said.

According to another person familiar with the matter, France Telecom will contribute EUR1.2 billion to the joint venture. It was not immediately clear if this will be in cash or assets.

The joint venture, described by the people familiar with the situation as a "merger of equals," will have a combined 30 million customers, excluding Virgin Mobile, which runs on T-Mobile's network, and 38% of the fiercely competitive U.K. mobile market, where it will battle with O2, Vodafone Group PLC (VOD) and Hutchison Whampoa Ltd.'s (HUWHY) 3.

No full takeover is planned by either side in the foreseeable future and the companies plan to run the joint venture independently, the people added.

France Telecom and Deutsche Telekom declined to comment.

The move follows intense speculation about a potential sale of T-Mobile U.K. after Deutsche Telekom earlier this year said it was evaluating all options for the business, and Chief Financial Officer Timotheus Hoettges in May put an equity value of GBP3.3 billion on the unit.

In its first quarter, when it lost 111,000 customers (including Virgin Mobile customers), Deutsche Telekom took an impairment of EUR1.8 billion on T-Mobile UK.

Still, T-Mobile's second quarter showed some improvement in the rate of mobile service revenue decline in euro terms, down 11.4% year-on-year in the three months to June 30 from a decline of 20.4% in the first quarter.

Vodafone, the world's largest mobile phone operator, is believed to have also run the slide rule over the business, for which Deutsche Telekom hoped it could get around EUR4 billion in any sale, according to media reports.

But a potential outright takeover looked unlikely with a wide variance in asset valuations keeping buyers and sellers apart, particularly in the current economic climate and as mobile operators cut back on expenditure so they can return cash to shareholders.

The U.K. mobile market is one of the most crowded in Europe, with four large operators as well as challenger network 3 all vying for the wallets of mobile subscribers, increasing competition and further depressing prices already under pressure from regulatory shifts.

The network operators have looked to keep costs down through network-sharing agreements, with T-Mobile UK sharing its network with 3, and Vodafone recently tying up with Telefonica's O2 in a wide-ranging deal.

Orange has a smaller network-sharing deal with Vodafone.

The deal is likely to be looked over by the U.K. Office of Fair Trade, which considers all deals that create an entity with a market share greater than 25%, and, depending on its make-up, could also attract the interest of the European Commission.

-By Kathy Sandler and Geraldine Amiel, Dow Jones Newswires; 44-207-842-9293; kathy.sandler@dowjones.com;

(Archibald Preuschat in Dusseldorf contributed to this article.)