UPDATE 1-Mediaset files antitrust complaint vs Sky Italia

* Italian pay TV market dominated by Sky

* Mediaset: USB key breaches EU rules

* Sky Italia says key will help Italy digitalise (Adds Sky comment, paragraphs 5-6)

MILAN, Nov 17 (Reuters) - Italy's Mediaset (MS.MI) said it had filed a complaint with antitrust officials against News Corp (NWSA.O) unit Sky Italia over a USB key that allows Sky Italia clients to view free digital terrestrial channels.

The Italian pay-TV market is dominated by Sky Italia, which broadcasts on satellite. Mediaset is challenging Sky's position with a low-cost pay-TV offering using digital terrestrial frequencies.

"The distribution by Sky of this key breaches (European) community and national rules on competition," Mediaset said in a statement on Tuesday.

Mediaset said the USB key aims to slow the sale of devices that allow viewers to access pay programmes and services offered by other operators.

Sky Italia Chief Executive Tom Mockridge said in a statement that the key would help the digitalisation of Italy by offering a "service for consumers in a market in swift development.

"A development that, evidently, is not easy to accept for a group like Mediaset that for many years has been, and still is today, the main private subject operating in Italian commercial television and dominant in the advertising market."

Digital terrestrial television is set to gain greater importance as the analogue signal is phased out across the country by the end of 2012. (Reporting by Danilo Masoni; Editing by David Holmes and Tim Dobbyn)