UPDATE 1-Megacable signs service deal with Telefonica

* Mexico's Megacable to offer cellphone service

* Megacable will use Telefonica's network (Adds share price, background)

MEXICO CITY Aug 25 (Reuters) - Mexican cable television company Megacable signed a deal on Wednesday with Spanish telecom giant Telefonica (TEF.MC) to offer cellphone service using Telefonica's network.

The deal will make Megacable (MEGACPO.MX) the first company in Mexico to offer fixed and mobile phone services along with cable television and Internet -- known in the industry as "quadruple play," the companies said in a filing with the Mexican stock exchange.

Megacable will begin offering cellphone services around the end of this year. Telefonica is Mexico's second largest cellphone service provider.

Mexican authorities are anxious to increase competition in telecommunications.

America Movil (AMXL.MX), owned by Mexican billionaire Carlos Slim, has 70 percent of the wireless market, while the same tycoon's Telmex (TELMEXL.MX) controls 80 percent of the fixed lines.

Earlier in the day before the announcement was made, Megacable's shares closed 2.43 percent higher. (Reporting by Tomas Sarmiento; Editing by Richard Chang)