Updated from 7:48 a.m. EST

The

Federal Communications Commission

approved the merger of

Qwest Communications International

(Q)

and

U S West

(USW)

Friday, clearing one major regulatory hurdle for the deal.

The FCC's move comes a day after Qwest acknowledged that its talks to be acquired by a "major telecommunications company," widely presumed to be the German telecommunications giant

Deutsche Telekom

(DT) - Get Report

, were officially dead.

But the merger of Qwest, a long-distance communications company, and U S West, a regional Bell telephone company, must now be approved in the 14 states where U S West operates. Qwest's chief executive, Joseph P. Nacchio, has said several times that the state-by-state approval could prove to be contentious and might delay closing the deal.

Despite the FCC's approval, shares of both U S West and Qwest took a beating Friday. Qwest closed down 7 1/8, or 12%, at 52 7/8. U S West closed down 6 1/8, or 8%, at 70 3/8.

Weighing the companies' stocks was Qwest's announcement late Thursday that its suitor had withdrawn from the talks because it was unable to strike a concurrent deal with U S West.

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The American depository receipts of Deutsche Telekom rose 2 3/8, or 2.5%, to close at 95 7/16.

In a conference call on Friday, Nacchio reiterated his belief that a three-way deal would have been most beneficial for all three companies.

"U S West's terms were totally unacceptable to the buyer, and the buyer walked," a frustrated Nacchio said. By doing so, U S West "didn't mean to maximize shareholder value," he said. "It's one of the more bizarre set of circumstances that we've been affiliated with."

But he said he will now concede to U S West's aversion to the deal and focus back on Qwest's obligation to follow through with its acquisition of U S West. He also said the original reasons for the U S West acquisition -- an expanded customer base and the capability to push its broadband Internet services -- are still valid." We will continue to perform our obligations, and we expect U S West to do same," Nacchio said.

Friday's events essentially put Qwest and U S West back where they started a week ago, before a barrage of rumors, leaks, accusations and lawsuit threats shook the foundations of both companies and rattled the nerves of investors.

Nacchio, clearly rattled himself by the lost opportunity, said that his relationship with U S West's chairman and chief executive, Sol Trujillo, remains "cordial and professional," despite the serious differences and sometimes angry exchanges between the two men.

"It's not like we go out drinking together at night," Nacchio said.

U S West and Qwest, both based in Denver, originally announced their merger deal last July, when Qwest's hostile bid for the local carrier eventually broke off a deal that U S West had previously struck with Bermuda-based

Global Crossing

(GBLX)

.

But the deal had begun to sour by Sunday, when Qwest said that it was in talks with a "major telecommunications company," and that Qwest's principle shareholder, the Denver billionaire Philip Anschutz, had given his blessing for the mystery deal.

The statement followed speculation in the U.S. and German news media that Deutsche Telekom was talking to Qwest about a possible takeover.

U S West responded that it had not been informed of any such talks, and that it was prepared to file a lawsuit seeking damages beyond the deal's $800 million breakup fee if Qwest were to back out of its merger deal with it.

On Thursday, U S West said it might be willing to consider alternative agreement, as long as it would benefit U S West shareholders and did not jeopardize its deal with Qwest. Deutsche Telekom executives also reportedly met with executives from both companies in Denver, but was unable to hammer out a suitable deal with U S West, and it ended discussions with both companies.

With U S West and Qwest now back on track to complete their merger, and with FCC approval, the companies will now focus on the task of gaining state approval in the 14 Western and Midwestern states where U S West operates.

As a Baby Bell, U S West is not currently allowed to offer long-distance services in its territory. Antitrust concerns would prohibit Qwest from offering long-distance service in those areas until those local phone markets become more competitive for U S West's roughly 25 million residential and business customers.

As conditions to its approval Friday, FCC said the combined company would have to divest itself of all of Qwest's customers in U S West's existing markets until those markets open up to multiple local carriers. The commission demanded that Qwest immediately form a plan to move those customers to other carriers before the merger gets final approval, and execute that plan before the merger can be completed.

So far, the deal has been approved by Colorado regulators, and conditional settlements are being heard in Washington state, Utah, and Iowa. Initial hearings are scheduled for next week in Montana, and in April for Arizona and Wyoming. Unable to reach a settlement, Minnesota's regulators have handed the approval process off to an administrative law judge with more hearings expected in early summer. U S West's other territories -- Oregon, Idaho, North Dakota, South Dakota, Nebraska and New Mexico -- do not have approval authority.