* Proposals would enshrine net neutrality in EU rules
* Plan would limit web services for which telcos can charge
* Telcos say proposals are intrusive
* Internet activists fear inaction will create two-tier Internet (Adds La Quadrature du Net comments)
By Foo Yun Chee
BRUSSELS, March 31 European lawmakers will vote on proposals this week that could severely restrict telecoms operators from mining a potentially lucrative revenue source by charging content providers more to deliver services at faster speeds.
The proposals would enshrine net neutrality - the principle that Internet service providers must treat all traffic equally regardless of the source or content - in European Union law applicable across 28 countries.
They would also set restrictions on the kind of online services for which Internet providers can charge extra.
The European Parliament will vote at noon on Thursday on the recommendations tabled by a group of socialist, liberal and ecologist MEPs and an earlier less restrictive compromise agreed by a European Parliament committee.
Lawmakers, facing elections in May, are under pressure to pass consumer-friendly measures such as the latest proposal, which could have a big impact on industry.
If accepted, the proposals would put Europe ahead of the United States, where a court struck down federal rules on net neutrality in January following a challenge by Verizon Communications. It would come as a blow to telecoms firms faced with their fifth consecutive year of revenue decline.
Telecoms operators have seen profits badly hit by price competition in their traditional business of providing phone and Internet access to consumers and are now fighting for a share of the profits from popular and bandwidth-hungry services such as video streaming and music downloads.
Just last week, U.S. streaming video services company Netflix urged Internet service providers such as U.S. broadband provider Comcast to give free network connections to content companies, saying this was key to ensuring net neutrality.
The telecoms companies have spent billions building networks for such services and want to be able to charge for different services and speeds, which they say would enable them to invest in continual service upgrades.
Luigi Gambardella, head of the European Telecommunications Network Operators' Association (ETNO), said the EU lawmakers' proposals were "technically intrusive rules" which would threaten the Internet.
"All those businesses and organisations who now rely on services requiring high quality experience, like HD video on demand or telemedicine, will be affected," he said.
"What is the most worrying, the European internet will have to be managed in a completely different way than the rest of the world. Which would clearly harm the competitiveness of the European digital economy," he said.
ETNO members include Orange, Telecom Italia , Deutsche Telekom and Telefonica.
The current proposal, put forward by Socialist and Green party MEPs, says: "(Specialised) services shall only be offered if the network capacity is sufficient to provide them in addition to Internet access services and they are not to the detriment of the availability or quality of Internet access services."
Internet activists say regulators and lawmakers should prevent a two-tier Internet from emerging and clarify which kinds of online services access providers can charge extra for.
"We are worried that all Internet access providers will make deals with big content providers. The proposals from the greens, socialists and liberals will make sure small providers are not excluded," said Felix Treguer at advocacy group La Quadrature du Net.
Ryan Heath, European Commission spokesman for telecoms policy, said: "We are committed to net neutrality, to non-discrimination between packets of data on the Internet. We think our proposal achieves that."
The proposals need the blessing of the EU's 28 governments before they can become law. Currently only the Netherlands and Slovenia have net neutrality legislation in place. (Reporting by Foo Yun Chee; Editing by Tom Heneghan)