The account includes brand PR, advertising and customer relationship management work in European and Latin American countries where Telefonica has a presence.
Y&R Madrid won the business in a pitch including incumbents Bassat Ogilvy and Tandem DDB, which had previously split the brief, as well as McCann-Erickson, Publicis and Delvico Bates.
Veronica Filgueira, assistant to Y&R Madrid President Guillermo Navarro, said the agency's Madrid team will split PR work with other WPP owned agencies Burson-Marsteller and possibly Cohn & Wolfe.
A spokeswoman for BM would not confirm this, but confirmed that the firm oversees PR for several business units of Telefonica.
The appointment comes at a time when Telefonica has engaged in a major restructuring business to tidy up its balance sheet and find new growth markets.
The company, which posted its biggest-ever loss last year amid the recession in Latin America, announced last week it will seek to expand its broadband business in Spain and fixed-line franchise in Latin America.