UPDATE 4-Fidelity cuts fees amid brokerage price war

* Fidelity cuts online commissions to $7.95 per trade

* Move follows Schwab's cut to $8.95 in January

* Ameritrade CEO says may match cuts for top clients

* Fidelity plans ad campaign for BlackRock iShares funds

* Shares of rival online trading businesses fall (Adds E*Trade comment, updates share prices)

By Ross Kerber and Jonathan Spicer

BOSTON/NEW YORK, Feb 2 (Reuters) - Fidelity Investments said on Tuesday it plans sharp price reductions for U.S. online equity trading, the latest move in a price war among retail brokerages that drove down shares of several other firms.

Fidelity, the Boston-based mutual fund powerhouse, also said it plans to waive trading fees for 25 exchange-traded funds offered by BlackRock Inc's (BLK.N) iShares unit -- a striking partnership as Fidelity to date has largely avoided the fast-growing ETF space.

Both steps reflect the efforts of online brokerages to capture market share as retail investors rebalance their portfolios amid uncertain markets.

Broadly, the industry seems to be shifting to an equal-fee model that could benefit smaller investors, who in the past have paid more than traders with more assets or higher trading volumes.

As of Feb. 3 Fidelity, one of the country's largest online brokerages, will charge $7.95 per trade for U.S. equities, down from a previous tiered fee structure of $8 to $19.95 per trade.

The new flat rate is $1 per trade lower than the reduced rate announced last month by the largest online broker, Charles Schwab Corp SCHW.O.

Analysts had expected rivals to match Schwab, whose move had been seen as a grab for greater market share in the online brokerage industry as it slowed late last year. While trading volumes jumped in January, low interest rates have continued to hurt brokers' interest-based revenue.

Another big player, TD Ameritrade Holding Corp AMTD.O, has charged a flat $9.99 per trade rate since 2006.

A spokeswoman for E*Trade Financial Corp (ETFC.O) said on Tuesday it is not changing its pricing, which starts at $12.99 per trade but drops for clients who make more than 30 trades per quarter or keep more than $50,000 in assets.

Speaking at a Morgan Stanley investment conference on Tuesday after Fidelity's news, TD Ameritrade Chief Executive Fred Tomczyk said his company is prepared to match Fidelity's $7.95 price per trade, at least for what he called "key clients."

But Tomczyk added that the company sees no reason to change its fees now and called changes by others "a zero sum game" likely to reduce profits for all.

The markets bore out this view, as the move by closely held Fidelity sent shares of rivals down in Tuesday trading.

Shares of TD Ameritrade fell 2.7 percent; shares of E*Trade were down 1.3 percent, and Schwab's shares were down 1.0 percent in afternoon trading.

Collins Stewart analyst William Tanona wrote in a note to investors on Tuesday: "Pricing wars are generally a no-win situation for the industry because these price reductions are generally met by others in the industry, and therefore do not result in market share gains but place pressure on commission revenues."

On a conference call with reporters, Kathleen Murphy, president of Fidelity's personal investing unit, took aim at rivals.

"Clearly, this puts us head and shoulders above our major online brokerage competitors," she said.

The move is also a partial answer to analysts who have wondered whether Fidelity would soon offer more ETFs in addition to the solitary one it now has. Retail investors have stuffed money into the vehicles, which feature low fees and tax benefits and have grown 145 percent since 2005 to more than $1 trillion in assets, according to BlackRock figures.

Schwab introduced its own line of eight index-tracking ETFs in November and allowed its customers to trade them commission-free online.

Fidelity President Rodger Lawson has dismissed ETFs in past interviews, noting their low profit margins. He said Fidelity did not bid on the iShares business that BlackRock bought as part of its $13.5 billion deal for Barclays Global Investors last summer.

Murphy said Fidelity has decided to partner with BlackRock as the largest provider of passively managed ETFs.

It already resells the full line-up of iShares ETFs, but Fidelity now will waive trading fees on 25 iShares funds that have proven popular with customers. The companies also will begin advertising the products, Murphy said, without offering details of how much spending would be involved.

Asked if Fidelity might introduce actively managed ETFs, she said: "We are looking at that, particularly as we are the largest active management company," a reference to Fidelity's huge slate of traditional mutual funds. (Reporting by Ross Kerber; additional reporting by Jonathan Spicer; editing by John Wallace and Gerald E. McCormick)