By Paul Sandle
LONDON (Reuters) -Vodafone said on Monday it was in "active discussions" about a deal in Italy, its worst performing major market, as it reported a slowdown in growth in its biggest, Germany, in the third quarter.
The British group rejected a merger offer from rival Iliad in Italy last month in favour of pursuing other options.
Sources have said that Vodafone (NASDAQ:VOD), which last year agreed to merge with Hutchison's Three in Britain and sell its Spanish operation, is exploring a deal with Swisscom's Italian unit Fastweb.
Chief Executive Margherita Della Valle said the group was "engaged in live discussions" in Italy.
"Our focus remains on delivering the best value creation for Vodafone, as we've done so far in driving consolidation."
Vodafone reported third-quarter service revenue growth of 4.7%, the same as the previous quarter, as a smaller decline in Spain helped offset the weaker contribution from Germany, where growth slowed from 1.1% to 0.3%.
Della Valle said the German slowdown reflected one-off benefits in the previous quarter.
"The underlying commercial performance is accelerating," she said. "Broadband churn is now behind us and we have great offers in the market supported by superior fixed and mobile networks."
Italy was the toughest market, with service revenue declining by 1.3% in the third quarter.
Shares in Vodafone, which have fallen 25% in the last 12 months, were trading down 1.2% in early deals.
Analysts at Citi said the update was broadly in line with expectations "though the slowdown in Germany may be a concern".
Last month Vodafone said it was in talks with more than one party in Italy, with one source familiar with the matter saying talks with Swisscom were more advanced than others. Swisscom declined to comment at the time.
Vodafone reiterated its full-year guidance for broadly flat adjusted core earnings of around 13.3 billion euros ($14.3 billion), and free cash flow of around 3.3 billion euros.
Analysts, however, are sceptical. They expect on average earnings of 13.07 billion euros and cash flow of 3.13 billion euros, according to a company-complied consensus.
($1 = 0.9278 euros)