For the elite group of investment banks that advise on most of the world's biggest mergers and takeovers, the likely bid by Vodafone AirTouch of the UK for Mannesmann of Germany is proving a seminal event. As well as having the potential to be the largest ever hostile bid, it may set a more worrying precedent.

Goldman Sachs, one of that elite, was obliged on Monday to step down "temporarily" as an adviser to Vodafone after Mannesmann sought an injunction in a London court. It claims Goldman's previous work on a linked deal should preclude it from working for the British company.

Goldman's rivals might be expected to take some pleasure in its predicament, but most are too worried by the implications. As cross-border deals have proliferated, the few investment banks capable of handling such mandates are finding it increasingly difficult to avoid conflicts of interest.

In theory, investment banks should rule themselves out of advising companies when they are "conflicted" by other work - such as being an adviser to a rival company. However, several factors are making it harder for the most sought-after investment banks to draw the line.

First, there is a very high level of merger and acquisition activity as consolidation takes place across industries such as pharmaceuticals and financial services. The number and size of such deals are at record levels, with deals worth $2,800 billion (€2,694 billion) announced in Britain so far this year.

Second, consolidation among investment banks has meant that mergers and acquisitions (M&A) expertise - particularly on complex cross-border deals - is concentrated in a few hands. Goldman Sachs has advised on $973 billion of this year's deals, a touch above Morgan Stanley.

Goldman's current difficulty arises from the fact that it is was also an adviser to Hutchison Whampoa on its sale of Orange, the British based mobile telephone company which bid unsuccessfully for the third mobile licence in the Republic, to Mannesmann last month. It had accepted the mandate to advise on the Orange deal despite the fact that Vodafone was a longstanding and important client.

Goldman insists it has "acted entirely properly" and will challenge the Mannesmann action vigorously. However, the fact that the dispute ended up in court is unusual, and raises questions not only about how Goldman manages potential conflicts, but how they are handled by its rivals.

Until this week, Goldman appeared to have done a remarkably good job in managing potential conflicts. Other investment banks have been less lucky in similar cases. Credit Suisse First Boston (CSFB), one of the top five global M&A advisers, faced controversy earlier this year during a spate of deals in the aluminium industry. It advised both Pechiney in a three-way aluminium merger with Alcan, former owners of Aughinish Alumina in Co Limerick, and Algroup, and went on to act as adviser to Alcoa when the latter launched a hostile bid for Reynolds Metals a day later.

CSFB's reasoning was similar to that of other investment banks that have found themselves in such situations. It said there was no possibility of confidential advice from one deal being used improperly in the other because Pechiney and Alcoa were being advised by separate teams of CSFB bankers, who knew nothing about the other transaction.

The decision whether to take on a mandate is ultimately made by each firm's most senior M&A executives. Such senior committees now find themselves meeting constantly to make decisions, often acting under extreme pressure of time. They are also under other pressures: their decisions determine whether their bank is able to gain revenue from a potentially lucrative deal.

As a result, few investment banks are likely to feel immune from the problem that has struck Goldman this week. Each time they take a decision on a possible conflict, they must balance the potential loss of revenue against the potential loss of reputation.

Yet no matter how worrying the week's events, they can at least take comfort from one thing. The fact that there are so few of them is a source of strength as well as of reputational risk. As long as the top investment banks are needed to handle the biggest takeovers, the companies involved may have to accept the occasional appearance of conflict.