UPDATE 1-Proxy firm ISS backs Telus in share structure vote

* Telus says ISS and Glass Lewis back merging of shares

* Glass Lewis later retracts published report

* May 9 vote challenged by large investor Mason Capital

* Telus to pay fund managers to encourage vote in favor

TORONTO, April 24 (Reuters) - A prominent proxy adviser firm has backed a proposal by Telus Corp to merge its two classes of shares, the Canadian telecom company said on Tuesday, while another has pulled a report so it can consider a late filing opposing the move.

Telus said that Institutional Shareholder Services Inc and Glass, Lewis and Co LLC had recommended that their clients - large institutional investors - vote in favor of the proposal, which would eliminate Telus's dual-class share structure.

But Glass Lewis later said it had retracted its published report to consider a new proxy filing. The firm expects to update its opinion in the next day or two.

The vote is being challenged by Mason Capital Management LLC, a major investor. Mason said on Monday that scrapping the structure would unfairly discriminate against holders of the voting stock by diluting the shares.

Mason said Telus's claim of proxy support was premature and that ISS was also reviewing Mason's position and would update its recommendation. ISS was not immediately available to comment.

The dual-share setup was designed to comply with laws limiting foreign control of Canadian telecom companies at a time when U.S.-based Verizon Communications Inc was a major investor in Telus.

Telus said ISS concluded "the proposed transaction would align voting rights with economic interest (and) offers shareholders meaningful economic opportunity through increased trading liquidity".

Glass Lewis said the benefits of the simplified structure outweigh any "short term dilutive effects or costs resulting from the conversion," Telus said before the firm retracted its recommendation.

Telus said it was working with Canadian Imperial Bank of Commerce to encourage Telus's retail investors to vote in favor of the proposal at a meeting due on May 9. Telus will pay fund managers 10 Canadian cents a share for each vote they gather, as long as the proposal is ultimately passed.

Mason said that the offer of cash "only demonstrates that the right to vote has real value".