Competitive local exchange carrier XO Communications, which offers business customers voice and data services on its own network, said it has opted for Chapter 11 bankruptcy protection as a way of fending off creditors, after months of negotiations with potential investors failed.

Like many of the new carriers that emerged in the US over the past eight years XO's problem is its mounting debt in a telecom market that has been particularly hit by a glut of services and the global market downturn. 'Simply stated, the company has too much debt, given the current and projected level of business operations,' said XO in a statement.

Financier Ted Forstmann's Forstmann Little & Co. buyout firm, walked away from an offer to take a controlling stake in XO in the past week as existing XO shareholders, unhappy with the offer, looked to block the deal. Had it won approval, the deal would have seen Forstmann Little and Mexican carrier Telefonos de Mexico each investing a further $400m (£270m) in XO Communications.

That would have given the two investors an 80% stake in the operator, in which they have already sunk $1.5 (£1.01bn).

After filing for bankruptcy protection, XO said it would still try to enforce the agreement with Forstmann, although it also had other potential restructuring plans to bring it out of Chapter 11. The company also said it would propose a stand-alone plan to restructure its $8.5 billion in debt under court supervision.

XO also assured its customers that it would maintain operations of all of its current service offerings, despite its troubles.