Telstra, Australia's largest fixed-line phone operator, faces a government-imposed operational separation similar to the one Telecom is currently undergoing in New Zealand.

Australian Communications Minister Stephen Conroy has given Telstra an ultimatum to split its retail and wholesale businesses to comply with the government's strategy for broadband services.

Chief executive David Thodey, who took over the reins of the company in May, said he was disappointed with the government's decision, but will work with policy makers to reach an agreement.

"While we are disappointed the government has felt it necessary to introduce this legislation, Telstra remains committed to working with the government to find a solution that is in the best interests of the industry, the nation, Telstra and our shareholders," Thodey said in a statement. "Our approach to regulatory reform and the NBN (National Broadband Network) will continue to be driven first and foremost by the need to protect the interests of our shareholders."

Telstra's shares sank 4.3 per cent to A$3.11 on the ASX today and have declined 13 per cent this year.

Telstra's previous chief executive Sol Trujillo clashed with Australian Prime Minister Kevin Rudd and his predecessor John Howard over how to regulate the country's telecommunications industry. In 2006, Trujillo claimed rules to open access of its copper wire and optic fibre to its rivals below cost would "destroy" the company's value.

The Australian telecommunications company was initially left out of the bidding round to roll-out the country's high-speed broadband after it failed to include a small business plan in its November proposal.

The government prefers Telstra to undergo a voluntary separation, and will prevent it from acquiring additional spectrum for advanced wireless broadband while it remains vertically integrated, owns a hybrid fibre coaxial network and retains its interest in pay- TV operator Foxtel.

"The existing telecommunications anti-competitive conduct and access regimes have been widely criticised as being cumbersome, open to gaming and abuse, and provide insufficient certainty for investment," Conroy said.

If the telecommunications company decides against complying, the Federal Government can force it to keep its network operations and wholesale business at arm's length from the rest of the company; offer the same price for its retail business as it does to other carriers on its wholesale network; and implement structures making the separation transparent.