D. Telekom downgraded by banks on AT&T deal block

LONDON (Reuters) - Several investment banks cut their price targets and recommendations on Deutsche Telekom on Thursday as a premium from an expected $39 billion sale of its U.S. mobile business to AT&T all but evaporated.

The U.S. Justice Department filed a lawsuit on Wednesday to block the deal on competition grounds, leading analysts to cut their estimation of the deal's going through to about 20 percent from as high as 75 percent previously.

With little chance now of T-Mobile USA's being allowed to merge with any of its bigger rivals, the unit faces the prospect of going it alone in the medium term and being forced to sell cheaper products, hurting margins.

A planned 5 billion euro ($7.2 billion) share buyback may also be off the table, while a continued lack of financial flexibility without the anticipated $25 billion cash inflow could hamper Deutsche Telekom's activities in other markets.

"We think the deal is all but dead in the water, meaning an increase in near term competition in the U.S. wireless market as DT must go back into the fray, and a potentially protracted court battle," Bernstein Research analysts wrote in a note.

The bank cut its recommendation on the German telecoms provider to "market perform" from "outperform."

Banks including equinet, NordLB, WestLB, LBBW and Berenberg cut their target price for Deutsche Telekom stock but many kept "buy" recommendations, after the shares dropped nearly 8 percent on Wednesday's news.

On Thursday, they recovered slightly, trading up 1.4 percent at 8.929 euros by 1121 GMT, outperforming the market.

Commerzbank cut its recommendation to "add" from "buy," saying that even if the deal went through severe remedies running into the billions of dollars were likely to be imposed.

"The DoJ's lawsuit ... is a major setback. Precedents suggest the deal isn't off and may still be settled. However, delay now looks likely and chances are high that DT would have to share necessary remedies," analyst Heike Pauls wrote.

($1 = 0.695 Euros)

(Reporting by Georgina Prodhan; Editing by Jon Loades-Carter)