Mobile phone callers could benefit from £700 million in savings over the next three years after an official report yesterday accused operators of overcharging.

The Competition Commission told the UK's four biggest mobile companies - Vodafone, Orange, O2 and T-Mobile - to slash the prices they charge rivals for using their networks.

An average phone bill for calling mobiles from a landline should fall by around £18 a year once the cuts are fully implemented, telecoms regulator Oftel said.

Vodafone branded the Commission's report "fundamentally flawed" and said it would launch a legal challenge in the High Court. Orange and T-Mobile are considering whether to follow suit.

Conflict centres on the price mobile operators charge each other and BT for putting callers from rival networks through to their customers.

These "termination charges" usually account for around two-thirds of the total cost of the call.

The Commission claims operators have made their rivals pay up to 40 per cent more than the cost of providing the service, with those making the call ultimately footing the bill.

In order to tackle the problem, the watchdog has ordered a 15 per cent cut in the charges by July this year. This move alone would save consumers £190 million a year in calls from a landline to a mobile between now and 2006.

It has also recommended further cuts of 14 per cent and 15 per cent, minus the rate of inflation, over the next three years.

The move is anticipated to save customers calling one network from another, and from a landline, between £325 million and £700 million by 2006.

Consumer groups welcomed the results of the inquiry, which took 12 months to complete and cost the telecoms industry about £2 million.

Gill Bull, acting chief executive of the National Consumer Council, said: "At last the competition authorities have nailed the mobile phone operators for overcharging their customers."

The share price of the mobile operators was largely unaffected by the announcement.