Telecom was a state monopoly that went private in 1997. The Italian treasury still holds 3.4 percent of the shares and veto power over major decisions through next year.

Despite the veto, which includes the power to stop an investor from acquiring more than 3 percent of the stock, and despite pressure from unions, D'Alema said the government should stay out of the battle.

But, he added, the government would like Telecom to stay in Italian hands and would prefer that it not be split apart.

Italy's biggest unions on Monday called for an urgent meeting with the premier to discuss their worries that a takeover might lead to layoffs. Telecom has around 126,000 employees, mostly in Italy.

Olivetti's bold bid for the Italian communications giant has stunned the business world, in part because Telecom has more than five times the market value of Olivetti. If Olivetti succeeds, it would be Europe's biggest telecommunications deal.

Trading in Telecom Italia shares was so frenzied Monday that it was briefly suspended after shooting up 10 percent at the opening. The dollar volume of $1.6 billion in trades of Telecom Italia was a record for any day's trading of any company's share on Italy's Milan exchange.

Telecom closed up 8.5 percent and Telecom Italia Mobile, Europe's biggest wireless telephone operator, which is 60 percent owned by Telecom Italia, rose 6.4 percent. But Olivetti closed down 7.7 percent on concerns that it wouldn't be able to pull off the deal.

The gain left Telecom Italia at 9.86 euros a share, about $10.86 at current exchange rates.

Analysts and traders say Olivetti isn't offering enough for Telecom Italia. In its bid over the weekend, it offered to pay 10 euros, or $10.10 a share.

Goldman Sachs on Monday raised its investment recommendation for Telecom Italia, saying it didn't think Olivetti was offering enough and that Telecom Italia "could make a vigorous defense."

Telecom Italia enlisted some big investment bankers for the looming battle. It said Monday it is being advised by J.P. Morgan, Credit Suisse First Boston, Lazard Freres and Istituto Mobiliare Italiano.

The Italian government was reportedly being advised by Morgan Stanley Dean Witter.

The takeover will need a green light from Italy's market watchdog agency, Consob, which is now studying the Olivetti filing. If Consob says the filing doesn't provide enough information, Telecom Italia would be free to try to counter the bid.

Another potential problem for Olivetti could be its plan to raise cash by selling its investments in mobile operator Omnitel Pronto Italia, as well as fixed-line operator Infostrada, to Mannesmann, a German industrial holding company.

The Italian government granted Omnitel's operating license on condition that it not be sold off for five years, and there is one year left to meet that proviso.

Olivetti and Mannesmann control those two via a holding company 50.1 percent owned by Olivetti and 49.9 percent owned by Mannesmann, the biggest rival to the former German telephone monopoly Deutsche Telekom.

In Germany on Sunday, Mannesmann said it will pay Olivetti the equivalent of $7.8 billion for its stakes in Omnitel and Infostrada if the takeover bid succeeds.

Olivetti bid also relies heavily on debt financing from three U.S. investment banks — Chase Manhattan, Lehman Brothers and Donaldson, Lufkin and Jenrette — as well as Italy's Mediobanca.