Telefonica strengthens grip on Telecom Italia: source By Danilo Masoni MILAN (Reuters) - Spanish telecoms company Telefonica (TEF.MC) has agreed to hike its stake in rival Telecom Italia (TLIT.MI), a source close to the deal said, ending months of speculation on the future of the debt-laden Italian group and opening the way to asset sales. Under the terms of the deal, to be announced on Tuesday, Telefonica will boost its stake in Telco, the holding company that controls Telecom Italia, to an initial 65 percent with an option to bring the stake to around 70 percent, a source with direct knowledge of the situation told Reuters on Monday. Telefonica is already Telco's biggest shareholder with a stake of 46 percent, or about 10 percent of Telecom Italia shares. It will boost its stake in the Italian group to nearly 16 percent. Telefonica is set to acquire its additional shares from the other Telco shareholders: Italian banks Mediobanca (MDBI.MI) and Intesa Sanpaolo (ISP.MI) and insurer Generali (GASI.MI). The deal involves a "debt and equity" component, the source said, without elaborating. The complex deal values each Telecom Italia share at "just above" 1 euro, nearly twice the current market price of 0.6 euros a share, the source told Reuters. The deal is likely to lead to the sale or partial sale of Telecom Italia's treasured Brazilian unit Tim Participacoes, worth $10 billion on the market, as the increased Telefonica stake will likely generate antitrust problems. Telefonica and Telecom Italia were not immediately available to comment. The Italian shareholders declined to comment. Telefonica and the other Telco shareholders took control of Telecom Italia in 2007 in a deal that valued the Italian company's shares a hefty 2.8 euros a share. Telecom Italia, hit by a deep recession at home, had since struggled to deliver investment returns and the Italian shareholders were eager to offload their holdings, several sources have told Reuters. Telco owns 22.4 percent of Telecom Italia and its investors, bound in a pact, were faced with a September 28 deadline on whether to quit their pact early and sell their shares. In Rome, a deputy minister signaled on Monday the government would not block a foreign takeover of Telecom Italia. "We all would like that companies remain Italian, but this would be a dream, the real world is that made of global competition," said Italy's deputy Industry minister Antonio Catricala on Monday. Telefonica has been studying various options to buy out the other Telco investors without adding to its own substantial debt burden. Telecom Italia, which risks having its credit rating being cut to junk in the coming weeks, has struggled to grow because of its 29 billion euro debt and falling margins. Additional reporting by Gianluca Semeraro and Lisa Jucca in Milan, Writing by Lisa Jucca; Editing by Ken Wills