Deutsche Telekom has admitted that it used private investigators to monitor conversations between board members and journalists.
The incidents occurred in 2005/6 when the company was going through a major restructure involving over 30,000 job losses.
Reports suggest that some in management were concerned that directors were passing information to journalists.
Deutsche Telekom insists that no phones were bugged, and that the investigative teams merely went through phone records to see who was calling whom.
The story was broken by German magazine Der Spiegel and has prompted the German government, which owns 32 per cent of Deutsche Telekom, to launch an immediate investigation.
"I am completely shocked by the allegations," said Deutsche Telekom chief executive Rene Obermann. "We have involved the state prosecutors and will support them in their efforts to conduct a thorough investigation."
The incidents took place while Kai Uwe Ricke was chief executive. Ricke left the company in November 2006, and Deutsche Telekom was governed by supervisory board chairman Klaus Zumwinkel, who has now resigned over tax avoidance.
Both men have denied any involvement in the use of private investigators.
The case is very similar to practices at HP at around the same time in which board members and journalists were actively, and illegally, investigated on a similar pretext.
The HP case led to a fine of $14.5m, and the firm was sued by the journalists and their family members who were spied on.
Patricia Dunn, who was HP chairman at the time, resigned over the scandal, although she has since been cleared of any wrongdoing.
The Deutsche Telekom case has caused a huge storm in Germany, where memories persist of the East German Stasi spying on its own citizens.
Former German industry federation president Hans-Olaf Henkel called the case "just as reprehensible and disgusting" as the Stasi's methods.
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