French investment firm Vauban Infrastructure Partners has also been shortlisted to carry out due diligence on the unit which is valued at more than 2 billion euros ($2.15 billion), said the sources, who asked not to be named as they were not authorized to speak.

Dutch pension fund PGGM may team up with Allianz as part of a consortium, another source said, while Vauban could also seek a bidding partner.

Telefonica, Allianz, CDPQ and PGGM declined to comment. Vauban didn't respond to a request for comment.

Telefonica, advised by BBVA and AZ Capital, is selling a minority stake of about 45% of the business, which operates in towns with fewer than 20,000 inhabitants.

The stake sale will free up much-needed cash for debt-laden Telefonica to fund the rollout of new broadband infrastructure in rural areas in Spain, as well as in Germany and Brazil where the telecoms giant aims to reach a market penetration of up to 97% by 2024.

Telefonica is already partnering with Allianz and CDPQ to offer similar fiber services to scarcely populated areas in Germany and Brazil, respectively.

Private equity and infrastructure funds have been investing heavily in Spain's fiber network, with U.S. buyout fund KKR and European rival Ardian clinching deals last year for fiber optic firms Reintel and Adamo, respectively.

In May, Axa and Swiss Re bought wholesale fiber operator Lyntia Networks, which controls a 43,000 km fiber network in Spain.

($1 = 0.9317 euros)

(Additional reporting by Isla Binnie, editing by Pamela Barbaglia and Bernadette Baum)

By Andres Gonzalez