Telstra shareholders and analysts are alarmed the telco giant could be used as a Morrison government foreign policy tool to outbid China in buying the Digicel Pacific phone network in neighbouring island countries, via a $2 billion taxpayer-backed consortium.

Telstra stunned the sharemarket on Monday by declaring it was in talks to take a minority equity investment in Digicel Pacific after being approached for support by the government, confirming reports by The Australian Financial Review.