TPG Telecom and Vodafone Hutchison Australia are in talks to create the nation's third telecommunications giant, which could dramatically reshape the industry at a time when margins are being squeezed by intense competition in mobile and broadband.

Telecommunications shares surged on Wednesday as investors bet a possible tie-up between reclusive billionaire David Teoh's TPG and Vodafone could bolster industry profitability, though some experts warned a bigger company could embolden Mr Teoh's "scorched earth" approach to securing market share in mobile and broadband.