BT is facing a criminal investigation by prosecutors in Milan over allegations of embezzlement and false accounting in its Italian division, according to reports.

The case will be spearheaded by Fabio De Pasquale, who previously led a high-profile inquiry into former Italian prime minister Silvio Berlusconi, the Financial Times said.

It comes after nearly £8bn was sliced off BT’s share price on Tuesday when the firm booked a £530m writedown and warned that profits would take a hit from the fallout of an accounting scandal in its Italian arm.

The telecoms giant said that following an independent review of the business by KPMG, the “extent and complexity of inappropriate behaviour in the Italian business were far greater than previously identified”.

The net result is there has been an overstatement of earnings at BT’s Italian business over a number of years, leading to the upwards revision in the value of the writedown.

The firm said it expects the affair to result in a reduction in its third-quarter adjusted revenue and adjusted earnings of around £120m.

For the financial year as a whole, BT expects adjusted revenue to decrease by around £200m and adjusted earnings by £175m. It expects to take a similar hit next year.

BT also warned that the outlook for UK public sector and international corporate markets has “deteriorated”.

The Italian business accounts for around 1% of BT’s earnings.

Shares in BT were up more than 1% in early afternoon trading on the London Stock Exchange.