Telefonica has denied reports in the Spanish press on Friday that chairman Juan Villalonga has agreed to resign over an insider trading scandal. However further reports in the local and international press over the weekend have added heat to the rumour.

Grupo Prisa-owned financial newspaper Cinco Dias reported Friday that Villalonga had agreed to step down from the top job in order to remain head of Telefonica internet subsidiary Terra Lycos. The report said an announcement could be made as soon as the next company board meeting on July 26.

It was followed by Prisa-owned national daily El Pais on Saturday which suggested that Villalonga may be negotiating a position with a US internet company instead. Other national and international media joined the bandwagon, quoting Telefonica insiders who said that Villalonga was under pressure to leave the company before July 26.

However, according to Reuters, talks to secure Villalonga's resignation have stalled on the issue of how much severance pay he would receive.

Villalonga is under investigation by the Spanish stock market regulator, the National Market Values Commission (CNMV), for allegedly benefiting from insider information when he bought and sold stock options on his own company in 1998. The allegations are only the latest in a string of controversies surrounding Villalonga, including sparring with the government over a failed merger with Dutch telco KPN and a much-criticised stock options plan for top Telefonica executives.

Villalonga's exit could jeopardise proposed deals at the company, including the Terra-Lycos fusion and Bertelsmann's role within it. In addition, Spanish financial paper Expansion reported over the weekend that the controversial appointment to the Telefonica board this month of Martin Bangemann, a former EU commissioner on telecommunications, has been put on hold.

Adding fuel to the fire, the Spanish government on Friday passed a new decree requiring greater financial transparency on the part of companies listed on the stock exchange. The decree is seen by many as a direct response to the Villalonga investigation.

The decree expands the existing norms to require all top executives of listed companies to disclose details of stock trading, stock option plans and any other financial instruments involving their companies within seven days to the CNMV.

"Villalonga exploited a loophole in the law by taking options on shares rather than buying actual shares," explains a Madrid-based investment broker.