Wall Street was abuzz with telco pairing possibilities Thursday in the wake of reports that SBC ( SBC) and AT&T ( T) have rekindled merger talks.

With a potential blockbuster phone deal in the works, contingency planning and speculation moved into high gear among industry observers and investors. The obvious matches include a counteroffer for AT&T from Verizon ( VZ) or BellSouth ( BLS), a move by one of the Bells for MCI ( MCIP), or a possible linkup between Verizon and Sprint ( FON). Shares in would-be targets like AT&T and MCI rose, while shares of would-be acquirers like Verizon and SBC slipped.

Even Verizon CEO Ivan Seidenberg, who is typically dismissive of consolidation pressure, seemed to concede on his company's earnings conference call Thursday that the industry is at a bit of a crossroads.

Verizon, like all the Bells, has both a shrinking regional local phone business and a thriving wireless unit. What's lacking, arguably, is a large presence in business services and international voice and data operations.

Should one of the Bells like SBC or BellSouth acquire a long-distance and business-services specialist like AT&T, it would suddenly expose a large gap in Verizon's service offering.

Asked on the conference call why there would be any reason to acquire a long-distance company with eroding revenue and margins, Verizon chief Seidenberg pointed to the compelling business services component of the hypothetical long distance company.

"Enterprise is of interest to us," said Seidenberg, adding "we look at everything every day."

As generic as that response may sound, to some investors it was a clear signal that Verizon is keeping its options open.

Though reports by The Wall Street Journal and The New York Times have AT&T and SBC in advanced merger talks, sources familiar with the discussions say nothing is particularly imminent, and that no exclusive allegiances have been created.

"I know for a fact that every major carrier has had merger discussions with at least one Bell," says Forrester Research analyst Lisa Pierce.

One source familiar with BellSouth's discussions with SBC said he "doubted that AT&T and SBC could reach an agreement." He also said that BellSouth was "still very much in discussions with several potential merger candidates."

Some investors were changing their telecom investing strategy Thursday as the market reacted to the latest merger talks.

"My thought is that there will be speculation that Verizon has to do something," said one Wall Street hedge fund manager, who sold his Verizon position Thursday. As for what he thought Verizon would do, he said, "Sprint makes a lot more sense than MCI."

Sprint and Nextel ( NXTL) are involved in a $30 billion so-called merger of equals, and the hedge fund manager said he thought Nextel could "take a hit" if Sprint was considered in play.

A Sprint representative declined to comment on the speculation and said: "We remain excited about our pending merger with Nextel and remain confident it will gain the necessary regulatory approvals."

Though the regulatory hurdles to some of these deals would be daunting, industry watchers say approval would likely come with time.

Seven years ago, Reed Hundt, then chairman of the Federal Communications Commission, called a potential merger of AT&T and SBC "unthinkable." But new Internet calling technology, cell phone ubiquity and a retreat from the consumer market by Ma Bell and MCI have created a much different phone market, relieving many anticompetitive concerns lately, say observers.

Not every investor was gung ho on big phone mergers. One New York trader called the recurring notion that the Bells need to go out and buy long distance assets and big business customers merely "knee jerk reactions."

"Verizon should concentrate on its current plan rather than be seduced into a bidding war over mediocre assets," says the trader, who has remained on the sidelines.