The iPhone, which should be on sale in time for Christmas, is expected to prove a key weapon in enabling O₂ to win and retain customers in one of Europe’s fiercest mobile markets. It is understood that negotiations are continuing with mobile phone retailers including Carphone Warehouse over an agreement to sell the iPhone in their stores after a period of exclusivity with O₂.

Shares of O₂’s owner, Telefónica of Spain, are expected to surge today on the back of the news. The deal will come as a bitter disappointment to Vodafone, which had been tipped as the front-runner for the deal. Arun Sarin, Vodafone’s chief executive, had been pushing hard to secure a deal for the iPhone, which has been at the centre of one of the most fiercely contested mobile battles since the £22.5 billion auction of 3G rights. However, as negotiations reached a climax, he is thought to have decided that the commercial terms on offer were not viable.

Apple’s agreement with O₂ is thought to include a continuing share of the revenues generated by each iPhone customer. O₂’s network will also have to be specially configured to accommodate the Apple handset. The lure of the Apple brand is expected to lead thousands of UK mobile customers to ditch their existing contracts and switch to the iPhone provider.

In frenzied interest in the United States, more than 500,000 units were sold during the first weekend of sales. AT&T, the exclusive American network, claimed to have sold out of the iPhone in most of its 1,800 stores within 24 hours.

O₂ hopes that the Apple deal will help it to cement a niche as the country’s major music mobile operator. The group has already rebranded the former Millennium Dome as the O₂ and transformed it into a concert and leisure venue. The deal is one of several negotiated by Apple across Europe. T-Mobile is understood to have secured an agreement to provide the phone in Germany, its home market. Orange is tipped as the likely front-runner in France. Apple, which had initially considered striking one Europe-wide deal, is thought to have felt that it could maximise revenues by negotiating individual market tie-ups. The California-based group is also thought to have been keen to ensure that it worked with the strongest operator in each country.

In the UK customers signing up for an iPhone are likely to face hefty fees to buy themselves out of their existing contract and move on to O₂’s network. The phone is expected to retail at about £300 in a market where phones are traditionally given away.

Rival handset manufacturers are busy preparing “iPhone killers” for Vodafone and the other losing operators. O₂ and Vodafone both declined to comment.