UPDATE 3-Vodacom, MTN slide on South African call rate cuts
* Regulator proposes to cut rates by 75 pct
* Vodacom shares drop 4 pct, MTN down 3 pct
* Telkom shares jump 5 pct (Adds comment from Vodacom, updates share prices)
By Tiisetso Motsoeneng
JOHANNESBURG, Oct 7 (Reuters) - Shares of South African mobile operators Vodacom Group and MTN Group fell sharply on Monday after the telecoms regulator said it planned to cut by 75 percent the fees they can charge rivals to use their network.
Conversely, after years of paying higher charges to connect to the two dominant mobile firms, fixed-line operator Telkom saw its shares jump to a 1-1/2 year high.
The government, facing elections next year, is on a push to reduce call costs that are above the average on the continent.
The Independent Communications Authority of South Africa (ICASA) said on Friday after the market closed that it planned to cut so-called mobile termination rates (MTR) to 10 South African cents by 2016, from 40 cents now.
The fixed-line termination rate - the amount mobile phone companies pay for calls to landlines - will remain unchanged.
"It has blasted the way open by drastically reducing the single largest cost factor in prices, namely the MTR, which both Vodacom and MTN enjoy," said Alan Knott-Craig, chief executive at privately owned No. 3 mobile operator Cell C.
However the chief executive of Vodacom, a unit of Britain's Vodafone Plc, said the plan - which includes a 50 percent rate cut by early next year - was "too steep" and could have "serious negative impact" on its business.
Shameel Joosub also said in the statement the cuts meant Vodacom would end up effectively subsidising smaller competitors such as Telkom and Cell C.
Three years ago, ICASA ruled a lack of competition in connecting calls had led to inefficient pricing, and imposed new pricing on Vodacom and MTN for mobile connections.
Yet South Africa still ranks 30th among 46 African countries in terms of pre-paid telephony affordability, according to a 2012 study by Research ICT Africa.
The report cited neighbouring Namibia as having some of the cheapest call rates despite having had similar call termination rates as South Africa only a few years ago.
ICASA's draft regulations are due to be published this week and companies will have 14 days to comment.
If past experience is anything to go by, the companies are likely to drag their feet in passing on the cuts in the form of lower tariffs, according to Spiwe Chireka, a telecoms analyst at advisory firm IDC.
"Service providers are not quick to cut rates when termination rates go down. It would be interesting to see how ICASA or the Department of Communication would ensure that those mobile termination cuts are transferred into consumer tariffs," she said.
Shares of Vodacom, which has the largest number of South African subscribers and a market value of $18.4 billion, ended down 4.2 percent at 116 rand.
MTN, which with a market value of $37.5 billion is Africa's largest mobile operator but has a smaller portion of the domestic market, dropped 3.1 percent to 193 rand.
Telkom, on the other hand, jumped 5 percent to 26.7 rand, after earlier hitting its highest since February 2012. (Additional reporting by David Dolan; Writing by Helen Nyambura-Mwaura; Editing by Ed Cropley, Mark Potter and David Evans)