* Germany to go from 4 to 3 mobile network operators
* Telefonica must sell spectrum, rent out network capacity
* Approval seen encouraging further mobile consolidation
* KPN stock up as much as 4 pct, Telefonica Germany up 2 pct (Adds Almunia, analyst comments, share price reaction)
By Robert-Jan Bartunek
BRUSSELS, July 2 Spain's Telefonica won EU antitrust clearance for its 8.6-billion-euro ($12 billion) takeover of KPN's German mobile arm E-Plus, giving it a stronger position in Europe's largest phone market.
The ruling by the European Union's powerful antitrust chief Joaquin Almunia sends an encouraging signal to the region's mobile operators, who have lobbied for lighter regulation of mergers to allow them to bulk up after years of falling revenue.
Combining the German businesses of KPN and Telefonica will create the country's largest mobile operator by customers with a market share of roughly 31 percent, giving the Spanish firm more clout in its battle with Vodafone and Deutsche Telekom's T-Mobile.
KPN's shares jumped as much as 4.2 percent after the decision was announced, while Telefonica's shares were slightly lower. Shares in Telefonica's unit O2 Deutschland rose as much as 3 percent.
As the takeover will cut the number of German mobile network operators from four to three, the Commission insisted that the Spanish group rent out up to 30 percent of the merged company's network capacity and divest some radio wave spectrum.
Telefonica will also extend existing wholesale agreements and offer fast 4G mobile broadband internet to any company that wants to offer such services.
The Commission said these measures would allow for up to three new "virtual" operators - which do not have their own networks so pay others to carry their traffic - to enter the German market. Such players are already strong in Germany, where they sell cheaper plans often aimed at young people or immigrant populations.
Telefonica has already signed a deal with virtual operator Drillisch.
"The remedies to which Telefonica commits ensure that the acquisition of E-Plus will not harm competition in the German telecoms markets," European Competition Commissioner Joaquin Almunia said in a statement.
Almunia's aim was to ensure that consumers in Germany - who already pay among the highest mobile prices in Europe - do not face rising costs after the merger.
All major deals need the approval of the European Commission, which acts as a competition watchdog in the 28-member bloc.
PROFIT MARGIN SQUEEZE
Facing demands to invest in faster mobile and fixed networks, European telecoms groups are turning increasingly to consolidation as a way to gain scale and return to growth. Vodafone has been buying up fixed broadband companies in Germany and Spain, while operators in France and Spain are also weighing whether to make bids for smaller mobile rivals.
Europe has more than 100 mobile network operators, compared to just four major operators in the United States, something that the European industry has argued leads to destructive price wars and poorer-quality services.
Almunia said barriers had to be removed to make the European telecoms market stronger, referring to reforms pushed by Brussels to end roaming fees and foster cross-border services.
"These barriers are also what sets Europe apart from countries such as the United States and China. It's not about the number of operators. It's about the fragmentation of the EU market," he said. ($1 = 0.7331 Euros) (Reporting by Robert-Jan Bartunek and Foo Yun Chee; additional reporting by Hannah Boland, Leila Abboud in Paris and Harro Ten Wolde in Frankfurt; editing by Tom Pfeiffer)