UPDATE 2-Iliad roaming deal should end by 2018-watchdog
* New mobile group Iliad relies on France Tel to carry traffic
* Roaming should be limited to avoid distortion-regulator
* Opinion paves way for operators to negotiate network sharing (Network sharing details)
By Leila Abboud
PARIS, March 11 (Reuters) - France said new low-cost mobile operator Iliad should end its roaming deal with France Telecom by 2018 at the latest and called for closer scrutiny of its effort to build its own network.
Rivals Bouygues Telecom and Vivendi's SFR have criticised newcomer Iliad for dragging its feet on its network roll-out and relying too heavily on France Telecom to carry customer traffic while building its own.
France's Socialist government asked the competition regulator in November to study whether the contract conferred an advantage to Iliad and risked distorting the market.
On Monday, the regulator ruled that Iliad should not be allowed to rely on roaming past 2018 when its current contract with France Telecom ends.
It also called for a more interventionist approach to ensure that the new mobile player built a functioning network, such as an audit of its network investments and a calendar for roaming to be eliminated by geographic area.
"The real objective is the building of a fourth network that Iliad can use to serve its customers and respect its licence obligations, and roaming can be a part of that at the beginning but not forever," said Bruno Lassere, the head of France's competition regulator at a briefing on Monday.
Iliad's Free Mobile has captured 8 percent of the French mobile market since its launch in January 2012, signing up 5.2 million customers and touching off a fierce price war.
France Telecom and Iliad declined to comment on Monday.
Iliad pays 500-700 million euros a year to France Telecom under the terms of their contract through 2018.
Iliad or France Telecom can also choose to end the roaming contract in 2016.
Average revenue per mobile user (ARPU) fell 10 percent to 336 euros last year, according to the telecom regulator, with a further 10 percent drop predicted by France Telecom this year.
SFR and Bouygues have already launched staff cuts and other cost-cutting measures, while France Telecom is relying on attrition to reduce staff costs.
Investors, sector executives and bankers have speculated that competition could lead to consolidation among the four telcos or network infrastructure sharing deals to cut costs.
The government and the competition watchdog have signalled that they are against a return to three mobile operators, so network sharing is now the more likely option.
In a second part of Monday's ruling, the competition regulator laid out the criteria it would use to evaluate such network sharing deals, including whether they applied to cities or rural areas and the type of equipment involved.
The combined market power of the companies proposing to share equipment will also be considered, said Lassere.
That effectively rules out network sharing between the two largest players France Telecom and SFR, since it would give them too great sway on the market.
The guidelines on network sharing are likely to touch off renewed talks among France's mobile operators as they seek ways to restore profitability amid deep price cuts.
Second and third-place players SFR and Bouygues held talks last year about network sharing outside major cities, and France Telecom has also said it would be open to such collaboration. (Reporting by Leila Abboud; Editing by Lionel Laurent and Paul Casciato)