Telecom Eireann has replied to the European Commission's accusations that it has abused its dominant position, by charging Esat too much for handling its calls. The matter is due for an oral hearing in Brussels next month and the Commission will later rule of the issue.

If found guilty Telecom could face a very heavy fine, which would seriously embarrass the Government, its major shareholder.

The outcome will be very important for Esat which has felt the full brunt of Telecom's aggressive pricecutting on international and longdistance calls. It has consistently argued that Telecom's interconnect rates - the rate ESAT is charged for using the Telecom network - is too high.

It is unclear how long after the oral submissions a ruling on the matter will be given. Some sources said it would be the autumn, but others predicted that the EU might rule by summer.

Esat and Telecom would not comment on the content of reply to the statement of objections.

It is believed that Telecom has mounted an aggressive defence of its position. A Telecom spokesman confirmed last night that the state operator had replied to the so-called statement of objections, which the EU published last November. The statement outlined the EU's views on Telecom charges and sought a change in its practices.

The statement argued that Telecom should offer the same rates to Esat and the other smaller operators, as it would charge its own operating arm in its own accounts.

The statement followed a previous warning letter to Telecom. Some industry observers expressed surprise that Telecom had decided to defend its position. Its response is understood to be complex and detailed. It is understood to raise the issue of routers - devices which Esat and some other companies used to divert long distance international phone calls to their networks via the Telecom network.

This system, which Esat maintained was legal, but which the former Department of Transport, Energy and Communications did not, has since been replaced by a system called Switchlink.

However, it is understood that existing routers or auto-diallers as they are known have been left in place.