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Google is working on a basic mobile phone to extend its dominance in internet advertising to handheld devices, according to analysts.

Richard Windsor, of Nomura, the broker, said that Google representatives had talked about a device at an industry event in Germany. The report followed remarks by a Google executive in Spain, who admitted the company is working on a handset.

"Google has come out of the closet at the CeBIT trade fair admitting that it is working on a mobile phone of its own," Mr Windsor wrote in a research note. "This is not going to be a high-end device but a mass market device aimed at bringing Google to users who don't have a PC."

It is also known that executives from Orange, the mobile operator owned by France Télécom, were recently invited to talks with Google in Silicon Valley.

Sources described the session, which took place around six months ago, as a "brainstorm" and a probe into "early stage concepts".

Industry experts said that a Google move into mobile would most likely centre on some sort of "mvno" deal under which the internet search giant would partner up with an existing handset maker and use the network of an existing mobile operator - such as Orange.

Google would provide the operating system and have its brand on the handset. HTC, the Taiwan-based manufacturer, is deemed the most likely handset partner in part because it delivers a "white-label" service under which it will manufacture handsets under any brand name.

A Google spokesman today declined to comment on whether the company is working on its own handset but said that "mobile is an important area for Google". He added that Google remained focused on creating applications for mobile phones and "establishing and growing partnerships with industry leaders".

There have already been a string of reports suggesting that Google is preparing to enter the hardware market.

Simeon Simeonov, of Polaris Venture Partners, wrote earlier this month on his blog that Google had a team of 100 people working on software linked to a phone project. He also reported that Google and Samsung, the Korean technology group, are working together on a phone project, codenamed "Switch".

Google would have to balance any move into the mobile market against its alliance with Apple, the iPod maker, which in January unveiled its long-awaited iPhone device. Eric Schmidt, the Google chief executive, who also sits on the Apple board, recently claimed that Google and Apple were looking at extending their tie-up.

According to Mr Windsor, Google would avoid a conflict with Apple because it is targeting the bottom-end of the mobile market, through a basic device that would offer users that do not have PCs access to internet services. By contrast, Apple's iPhone, which will also be equipped with an internet browser, will cost about $500 (£260) in the US and resembles a hand-held computer as much as a simple phone.

However, analysts have noted that low-margin, basic devices only deliver profits when made in huge volumes by companies with massive production capacities – things that Google lacks.

Google is under pressure to diversify from its hugely successful search-advertising technology that brings in the vast majority of its profits. However, speculation that Google was working on a basic PC has so far proved unfounded.

Instead, Google has sought to take on Microsoft in the software market, most conspicuously through a suite of paid-for software tools, including e-mail, a word processor and a spreadsheet, that compete with Microsoft's dominant Office products.

Today, Google announced partnerships with the Rwandan Government and the Kenya Education Network, under which free versions of the Google Apps services will be provided to government workers and students.

Microsoft has so far shrugged off suggestions that Google could pose a serious threat to Office, which together with the Windows operating system is responsible for the lion's share of its profits.

Over the weekend, Steve Ballmer, the Microsoft chief executive, criticised Google at a student event at Stanford University. “Google built one very good business," he said. "Everything else is sort of cute.”

Last week, Microsoft bought Tellme Networks, a specialist in speech-recognition, for an estimated $800 million. Microsoft will use the firm's technology to enhance its own moves into mobile search markets.

Mobile numbers

Nokia

36.2 per cent market share in the fourth quarter of 2006

Up from 35 per cent a year earlier, making good ground lost after failing to offer "clamshell" models

Sold 103 million phones in the period

Motorola

22 per cent market share in the fourth quarter

Up from 17.8 per cent a year earlier on popularity of Razr model and basic phones for emerging markets

Sold 61 million phones

Samsung

11.3 per cent market share in fourth quarter

Down from 12.1 per cent a year earlier, but has recently signed deal to include Google applications on its handsets

Sold 32 million phones

Sony Ericsson

9 per cent in fourth quarter

Up from 7 per cent a year earlier, boosted by popularity of Walkman and camera phones

Sold 26 million phones

LG

6.3 per cent in fourth quarter

Down from 7.2 per cent a year earlier after shortage of new models; hopes new Prada phone will reverse the slide

Sold 17 million phones

Source: Gartner

Unknown quantity

Apple iPhone

Targeting sales of 10 million in 2008