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Nortel Networks, North America's biggest maker of telephone equipment, has filed for bankruptcy protection.

The move by the firm, based in the Canadian city of Toronto, came as the global economic downturn continued to eat into its already fragile business.

Under US Chapter 11 bankruptcy protection law, a firm can keep trading while it aims to sort out its finances.

Nortel employs about 30,000 people worldwide, including about 2,000 in the UK, where it is a key Olympic sponsor.

Its deal with the London Olympic organising committee is believed to be worth about £40m in cash and services towards the 2012 games.

A committee spokesman said they were "aware of the situation" and would "work through it with Nortel".

It is also a sponsor of the 2010 Winter games.

Challenges compounded

Nortel said that the bankruptcy protection was intended to help it "emerge from this process as a more focused, financially sound and competitive company".

The decision was made while it had sufficient funds to run operations and to cover restructure costs, it added.

The filing was made a day before the firm was due to make a $107m interest payment on outstanding loans.

Nortel said it had been in the process of revamping the firm since late 2005, the firm said, but that the global financial crisis and recession had "compounded its financial challenges and directly impacted its ability to complete this transformation".

The recession has hit global spending on information technology, while tight credit markets have made it more tricky to sell off parts of the business.

And some customers have been delaying orders as questions were raised over Nortel's viability, said UBS analyst Nikos Theodosopoulos.

"Nortel has enough cash to run its business this year and probably a good part of next year as well," he said, adding that a bankruptcy would give the firm "a better chance to preserve itself".

(Source: BBC News)