Telekom's shares, which had gained 24 per cent since the beginning of the year, responded by falling as much percent on profit-taking before recovering.

The 1998 bottom line was brightened by lower losses in international holdings, directory services and telephone equipment. Sales rose three per cent to 35.64 billion euros, limited by increasing competition in long-distance services.

Without the revenue Telekom collected for carrying calls for other telephone companies -- which reflects lost business -- last year's sales rose only 1.5 per cent, Telekom said.

WestLB Research's Holger Grawe had expected slightly higher sales but said the results as a whole were neutral.

"They are within the range of our expectations," Grawe said."We are keeping with our `underperformer' rating on the sharesbecause there was no positive surprise."

Telekom beat some analysts' expectations. In December Dresdner Kleinwort Benson forecast a net profit of 3.88 billion marks, or about 1.99 billion euros.

Telekom shares fell to as low at 33.12 euros, but had climbed back to 35.11 euros, up 0.6 per cent.

In a statement, Telekom also said it had reduced group net debt to 33.23 billion euros by the end of 1998.

Financial liabilities in the group, excluding the Hungarian telecoms firm Matav, were reduced as planned by 10 per cent to 39.58 billion euros.

The group said it was now assessing its future capital needs, but no decisions had been taken.

"Deutsche Telekom is requirements based on potential investment opportunities in the rapidly developing global telecommunications market and the resulting possibility of a second offering of shares," it said.

The group is due to release final 1998 results at a news conference on April 15, 1999.