Argentina's halting campaign to privatize inefficient state companies took its most concrete, and unusual, step yesterday with the announcement that bidders -- led by Citicorp and the Spanish firm Telefonica -- have offered to swap more than $4 billion of Argentine foreign debt for part ownership of the national telephone company Entel.

The deal would be the biggest debt-for-equity swap ever attempted in Argentina, which owes about $60 billion to foreign lenders. It would also be the first success of President Carlos Menem's program to sell off a host of money-losing state companies.

Public Works Minister Roberto Dromi said the Citicorp-Telefonica group is the highest bidder in the Entel sale, offering $2.72 billion in debt swaps for the phone company's southern region and $2.3 billion for the northern region.

Winning bidders will be required to invest $4.7 billion in the northern and southern zones combined over the next seven years. They must also make immediate cash payments -- $114 million for the southern section, $100 million for the northern -- and additional payments in cash over the next three years.

A Citicorp spokesman confirmed yesterday that the group had submitted the highest bids for Entel, but declined further comment.

Under the rules of the sale, the group will only be able to buy one of the two regions and must now decide which it wants. Some 40 percent of the equity in each region is reserved for sale to employees, stockholders and other small investors.

The competition was based solely on how much of Argentina's debt the bidders were willing to buy on the secondary market -- at about 13 cents on the dollar -- and exchange for equity in Entel. This would place the effective value of the bids for the phone companies at about $520 million.

A group including the Italian company Stet and French Cable and Radio submitted the runner-up bid in the southern region, while a U.S. venture of Bell Atlantic and Manufacturers Hanover Trust offered the second-highest bid for the northern region. Dromi said both losing groups may be allowed to submit new bids. Both American banks involved in the bidding are among Argentina's creditors.

He said Menem would announce the winners for both regions on Thursday.

The sale, if it finally goes through, would be the culmination of a process begun last July when Menem took office and immediately put a prominent conservative politician, Maria Julia Alsogaray, in charge of selling Entel. Menem's critics used the Entel sale -- and Alsogaray's presence in the administration -- as a focal point for their complaints that Menem was betraying his roots in the populist Peronist Party.

The Argentine telephone system is one of the worst on the South American continent. New customers wait years to get a phone; old customers wait months for repairs. At times of peak demand it can take five or even 10 minutes to get a dial tone. Some exchanges in metropolitan Buenos Aires simply cannot be made to connect with other exchanges. In an attempt to ready the company for sale, Alsogaray has ordered sharp rate increases in recent months.

The deal would represent Argentina's most significant debt-swap to date. Menem hopes to privatize the railroads, the state oil company and other state monopolies, and using the debt-swap mechanism has the dual effect of getting a money-loser off the books and at the same time bringing down the amount Argentina owes to lenders.

Entel is seen as one of the healthier of the state companies. The railroads, for example, lose more than $2 million a day, and there has been little interest from potential buyers.