Date: 3/19/2008 1:30:37 PM

Deutsche Telekom AG and Telecom Italia SpA led a drop in European phone stocks after the German company said domestic fixedline earnings would slide this year and on speculation the Italian operator may sell stock.

Deutsche Telekom and Telecom Italia shares both lost as much as 13 percent. The 21member Bloomberg Europe Telecommunication Services Index fell as much as 3.9 percent, the biggest slide in two months, with only two stocks rising.

Bonnbased Deutsche Telekom, Europes largest phone company, said sales and earnings at its combined Internet and fixedline unit in Germany will slide this year. Telecom Italia, which has 35.7 billion euros ($56 billion) of debt, fell after newspaper Il Messaggero reported the company may raise cash from investors for acquisitions. At the same time, the European Union reiterated today it will push for more competition and reduced tariffs.

``This is nothing but fear, said Juan Carlos Acitores, who helps manage the equivalent of $20 billion at Ahorro Corporacion in Madrid.

Deutsche Telekom fell as much as 1.46 cents to 9.92 euros in Frankfurt trading, the biggest slide since July 2002. The stock traded at 10.45 euros as of 1:52 p.m. Before today, the stock had lost 24 percent this year. Telecom Italia lost as much as 17 cents to 1.15 euros, the biggest plunge since September 2001. The shares traded at 1.23 euros as of 1:52 p.m. in Milan. They had lost 38 percent this year before today.

Deutsche Telekom Forecast

Deutsche Telekoms adjusted earnings before interest, taxes, depreciation and amortization at the fixedline division are forecast to fall 5 percent to 8 percent this year, with sales falling 4 percent to 6 percent, the Bonnbased company said in a presentation today. Last year, the units sales fell 8 percent and Ebitda slipped 14 percent.

The unit will deliver gross cost savings of 1 billion euros this year, and most will be reinvested into measures to stabilize sales, Deutsche Telekom said in a presentation for investors.

Chief Executive Officer Rene Obermann said in January fixed line customer losses in Germany will continue as more people use mobile phones exclusively. The company said today it plans to stabilize the units sales and Ebitda in 2010.

Telecom Italia may plan a capital increase to pay for takeovers, Il Messaggero reported, without saying where it got the information. Telecom Italias main shareholders met in Milan yesterday to discuss strategy and options for a new board to be elected at the next shareholder assembly, the newspaper said.

Telecom Italia isnt considering selling new shares, Chairman Gabriele Galateri said, according to comments confirmed by a company spokesman.

Regulatory Pressure

Viviane Reding, the European Unions telecommunications commissioner, said in a statement today that much more work needs to be done to break the market power of incumbent phone companies.

``The European regulatory model is designed to increase competition in the telecoms market and this certainly is starting to pay off, Reding said in a statement.

In November, Reding proposed giving national regulators the power to force dominant phone companies such as Deutsche Telekom and France Telecom SA to open their fixedline networks to competition. EU legislators are debating the proposed law, which would allow regulators to split the network and services of dominant phone companies.

``Regulatory action to bring down mobile termination rates and enforce more competition in the fixedline market is not good news for the dominant market incumbents, said Philippe Kiewiet de Jonge, who manages a $166 million telecommunications fund at ABN Amro Asset Management. ``This is an ongoing battle between Reding and the big operators and it seems shes determined to increase the pressure.

Source: http://www.bloomberg.com/apps/news?pid=20601100&sid=aa_Aib6Fq5Ww