* To spend $7 billion on network upgrade
* Declines to give iPhone cost details
* Says to use spectrum from Clearwire rival Lightsquared
* Sprint shares fall 20 pct; Clearwire down over 32 pct
By Sinead Carew and Supantha Mukherjee
NEW YORK, Oct 7 (Reuters) - Sprint Nextel Corp said it needs to raise more money and signaled it will burn through its cash reserves, raising concerns about the wireless provider's financial stability and business strategy.
Shares fell 20 percent to close at $2.41 on Friday, while its credit default swaps rose, reflecting greater concerns about a default risk. Shares of Sprint affiliate Clearwire Corp tumbled 32 percent to $1.39.
The news that Sprint could spend more cash than it brings in to upgrade its network provoked angry questions at an investor meeting with Chief Executive Dan Hesse.
Analysts complained that Hesse gave few clear answers and instead raised many fresh questions. In particular, they were worried that Sprint said its cash shortfall did not yet factor in the undisclosed sum of money the carrier has to pay Apple Inc for the right to sell the popular iPhone.
"They're going to be spending more money than they're bringing in for the next couple of years... even before iPhone costs," Hudson Square analyst Todd Rethemeier said, adding that this makes Sprint -- already a risky investment prospect -- an even more dangerous bet.
The Wall Street Journal previously reported that Sprint agreed to pay Apple $20 billion over four years as part of their agreement.
Hesse conceded that selling the iPhone would be expensive, but promised it would be "quite accretive" to Sprint's profits over time.
"The part we struggle with here is the fact that Sprint wants us to think about the subscriber benefit from the iPhone, but ignore the financial impact," Jennifer Fritzsche from Wells Fargo wrote in a research note.
Sprint outlined a plan to spend $7 billion on a network upgrade that it wants to complete by the end of 2013, two years earlier than previously suggested. The company said that upgrade would save it $10 billion to $11 billion.
Chief Financial Officer Joe Euteneur said Sprint would pay for the upgrade with cash from its balance sheet and by raising capital. He said he could not provide details as he wanted the flexibility of being able to tap the market at the best time.
The company also flashed a presentation slide saying it expects its liquidity to improve after 2013, implying a tough two years before that.
Analysts, many of whom have covered Sprint for years, told management that they did not understand the presentation and several asked about liquidity.
"Seeing all these balls in the air is a little scary," said Evercore analyst Jonathan Schildkraut.
Analysts said there was no immediate risk of Sprint defaulting on its debt. But, in a sign of investor nervousness, Sprint credit default swaps rose.
It now costs $1.5 million paid upfront to insure $10 million of Sprint debt for five years, in addition to annual payments of $500,000, according to data provider CMA. That is up from an upfront cost of $1.04 million plus $500,000 a year on Thursday.
Sprint owns 54 percent of Clearwire, and was questioned about how long it plans to support the venture.
Executives for Sprint said it would stop selling phones using Clearwire's high-speed WiMax network by the end of 2012, and refused to speak about plans beyond that.
Sprint also said it hopes to bolster its own network using spectrum from Clearwire's rival, LightSquared, backed by hedge fund manager Phil Falcone, if that becomes available.
Sprint declined to comment on whether it would offer Clearwire more funding. When asked if Sprint would let Clearwire go bankrupt, Hesse's response was that if there was a bankruptcy, he would "expect it to be constructive."
Clearwire Chief Executive Eric Prusch told Reuters that he was optimistic that the company would be able to raise the $1 billion financing it needs to continue to operate and upgrade its network. He added that Sprint was still dependent on Clearwire's network.
At the Sprint meeting, Joan Lappin of Gramercy Capital Management angrily asked why it was spending to upgrade its own network while Clearwire, which has much more spectrum than Sprint, needs funding.
The question was greeted by loud clapping and cheering among analysts and investors.
Sprint said its network upgrade would help boost its margin from operating income before depreciation and amortization by 4 percent to 6 percent by 2014. It also said it would raise its margins by another 4 percent to 6 percent by improving its operations.
But analysts questioned whether investors would see any boost in profit because of the spending plans.
Bernstein Research analyst Craig Moffett also worried that Sprint's service could suffer while it sets aside spectrum for the network upgrade. It is not clear how the company would avoid "creating a capacity gap" when there will be big demands on the network, he said, particularly iPhone users.
Sprint plans to upgrade its network using Long Term Evolution, the same technology used by bigger rivals, AT&T Inc and Verizon Wireless, a venture of Verizon Communications Inc and Vodafone Group Plc .