The Government is to break open Telecom's monopoly on its lines to ensure better and cheaper internet and phone services.

In the biggest telecommunication shake-up since the privatisation of Telecom in 1990, the Cabinet yesterday approved a package to "unbundle the local loop", essentially forcing the company to open its network to competitors.

Other providers, such as TelstraClear, ihug and CallPlus, will now be able to install their own equipment and provide customers with a choice of internet speeds, prices and services.

Industry observers were jubilant over the results of the long-awaited telecommunications review but shares in Telecom in Australia immediately fell 7 per cent at the news, wiping $760 million off the company's value.

In New Zealand there were signs some investors may also have got wind of the change.

Telecom, the sharemarket's top stock, had been down all day, but in the last 20 minutes of trading it fell a further 6c, to end 10c down at $5.55.

Minister scrambles after plan leaked to Telecom

Communications Minister David Cunliffe was forced to make the announcement two weeks before the Budget, after the decision was leaked to Telecom.

After receiving legal advice, Mr Cunliffe made a rushed public announcement of the commercially sensitive plan as soon as the sharemarket closed at 5pm.

The move comes after mounting Government frustration at problems with New Zealand's low consumer uptake of broadband and the high cost and slow speeds of internet service.

New Zealand is ranked 22nd out of 30 OECD countries for broadband uptake. "This is not an acceptable or sustainable position for a small, smart country," Mr Cunliffe said.

"The Government sees this as critical national infrastructure, without which we will not be able to compete internationally."

Mr Cunliffe said the aim was to have New Zealand reach the average OECD rate of broadband uptake by 2010 and be in the top quarter of countries by 2015.

The move aims to impose competition on Telecom, the country's largest listed company, which at present controls 92 per cent of broadband connections.

It will now be required to offer unconstrained internet speeds, or double the download speeds now available.