Telefonica SA's (TEF) 42.3% stake in the Telco holding company that controls Telecom Italia SpA (TI) is a "relevant problem" that needs to be solved and that the Italian government is watching closely, a top government official said Tuesday.

In comments confirmed by his spokesman, Italy's undersecretary for telecommunications, Paolo Romani, also said Telecom Italia's fixed-line network is a strategic asset that must remain in Italian hands, expressing Rome's opposition to any foreign control of the key infrastructure.

Speculation over Telecom Italia's shareholding structure has heated up in recent months, as an October deadline to renew or dissolve Telco's pact approaches.

"Telefonica's 40% stake in Telco is a relevant problem that needs to be solved. It's up to the company (to address it) but the government is monitoring closely," Romani said during a parliamentary hearing.

However, later Tuesday Romani said that Telecom Italia is a private company with its own rules and that the government can't take a stance on its shareholding structure.

Romani also denied press reports that he took a recent trip to China to find new investors in order to replace Telefonica's presence in Telco.

Telco, Telecom Italia's largest shareholder with a 24.5% stake, is owned by Spanish phone giant Telefonica, Italian banks Intesa Sanpaolo (ISP.MI) and Mediobanca SpA (MB.MI), insurer Assicurazioni Generali (G.MI) and the Benetton family.

Telefonica, which holds a 10% indirect stake in the Italian phone operator through Telco, had no comment on Romani's remarks.

Earlier this summer, press reports have indicated Telecom Italia was considering a plan to merge with Telefonica, but Telecom Italia has always denied such a plan.

Telefonica has repeatedly said its stake in Telecom Italia is a long-term industrial alliance.

-By Giada Zampano, Dow Jones Newswires; 39 06 69766925; giada.zampano@dowjones.com