The share sell-off came mainly from "mum and dad" investors, who appeared to wait until the company went ex-dividend before bailing out.
Making matters worse for the company at 4.40pm was a memo from rating agency Standard and Poor's.
While affirming the A/A-1 ratings, S&P revised the outlook on the long-term rating on Telecom to negative from stable.
"The outlook revision follows Telecom's recent confirmation that it is considering a structural separation from its copper access network from its remaining businesses in order to participate in the New Zealand Government's UFB network.
"We consider Telecom's vertically integrated business model to be a key driver of the group's strong business-risk profile," credit analyst Paul Draffin said.
Any separation of the fixed-line access network would have a material negative impact on the group's business risk profile, he said.
Telecom's shares opened at $1.98, and dropped as low as $1.93, before closing at $1.96.
Forsyth Barr broker Suzanne Kinnaird said that with the shares going ex-dividend by 6c, on an adjusted share price they were technically up 4c for the day.
The confusion and uncertainty started with an announcement by Telecom chief executive Paul Reynolds that the group was investigating structural separation in order to participate in the Government's ultra-fast broadband (UFB) project.
"Telecom's strong preference is to align the interests of its equity and debt holders with those of the Government and New Zealanders."
The Government's UFB initiative would fundamentally reshape the structure of the entire telecommunications industry in New Zealand and Telecom was therefore undertaking a thorough assessment of the merits of structural separation, he said.
Ms Kinnaird said that seemed to mean that Telecom was reassessing splitting Chorus off so it could participate in the UFB project.
It had said in the past that a separation was not viable.
"My feeling is that this simply adds another layer of uncertainty to the stock which won't be resolved until some definite decisions have been made both by Telecom and the Government."
Telecom was holding an analysts briefing later this week, when more detail might become available, she said.
Dr Reynolds said he had asked Communications Minister Steven Joyce to consider a variation on three components of Telecom's undertakings that it believed would be no longer relevant in a fibre future.
Telecom was required by legislation to deliver significant system and technology projects envisaged for a pre-fibre world.
A large proportion of those projects must be deployed this year and it seemed sensible at this time to reassess those projects to avoid significant congestion and waste.
The three amendments would not affect the service levels experienced by the end user and industry customers.
Instead, they reflected how fast the policy and technology environment was evolving in telecommunications, he said.
The proposed changes are to. -Suspend the forced bulk migration of existing broadband customers to a new copper-based broadband service.
Telecom will continue to supply the new broadband service to all new customers.
Remove the requirement for Telecom to transfer 17,000 customers to a new VoIP (voice-over internet protocol) system over copper service by the end of this year.
Remove the requirement for Telecom to build a new set of whole systems that are not consistent with the industry structure implied by UFB.
Mr Joyce said he regarded as positive Telecom's announcement it was considering structural separation as a possible way to become involved with the Government's UFB project.
"A potential structural separation of Telecom would involve a number of complex regulatory issues to work through.
I am encouraging Telecom to work with Crown Fibre Holdings and the Ministry of Economic Development."
Mr Joyce was conscious of the importance of certainty around the issues raised and would expedite Telecom's request through the usual process with an open mind.
Labour ICT spokeswoman Clare Curran has called for an explanation from the Government about the timing of the announcement from Telecom.
"The Government needs to reveal whether parallel discussions have been held with Telecom about structural separation while a closed tender process is under way to roll out UFB to 75% of New Zealanders."
Telecom's announcement suggested a parallel process had been under way for months, which could undermine the tendering process, she said.
It did not stack up for Telecom to now say copper-based services had no future, when the entire business case around its Next Generation Network was based on enhanced, cabinetised, high-speed copper services, Ms Curran said.
