Citing sources in Germany, The Observer said the talks had been going on for several days and that the impetus for such a deal had come after AOL — which owns the other 50 percent in AOL Europe — merged with Time Warner Inc (TWX.N) last month.

The newspaper said AOL Europe, which announced on Friday that it had increased its subscribers to 3.8 million from 2.8 million last September, was estimated by analysts to be worth some $7 billion.

AOL Europe is Europe's second largest Internet service provider behind Deutsche Telekom AG's (DTEGn.DE) T-Online service, which has more than 4.2 million users.

In a separate Sunday Times article, Chief Executive Andreas Schmidt was quoted as saying that AOL Europe would next month eclipse Freeserve, Britain's top Internet provider, as the biggest Internet service provider (ISP) in the UK.

Schmidt said AOL Europe would take first place after its high-profile one-pence-per-minute advertising campaign and the launch in Britain of Netscape Online, its subscription-free service.

After the AOL/Time Warner merger, speculation had mounted that AOL Europe could be floated, but Schmidt said on January 13 that there were no immediate plans for an initial public offering of the business. The Observer said that by selling its stake in AOL Europe, Bertelsmann would have a war chest that it could use to develop its multimedia operations and invest in Internet start-ups.