* Supreme Court to supervise corruption probe
* Telecoms ministry allegedly sold 2G licences cheaply
* Coalition government reeling from scandal
* (Adds details, background)
By Venkat Raman and C.J. Kuncheria
NEW DELHI, Dec 16 India's Supreme Court said on Thursday it will oversee a widening investigation into allegations of corruption in the sale of telecoms licences worth billions of dollars, a scandal touching the heart of government.
The government has struggled to contain the fallout from the sale of lucrative mobile phone licences at below-market prices in 2007-08. The scandal, potentially costing the state $39 billion in lost revenues, has already brought down a telecoms minister and kept parliament deadlocked for weeks.
Opposition parties have demanded a full parliamentary inquiry into what could be India's biggest graft case. The government has refused, fearful it might force the prime minister to testify.
The case has shaken the credibility of the government of Prime Minister Manmohan Singh, who has also been forced to defend himself at the Supreme Court over his handling of the allegations.
The court recently criticised Singh for taking more than a year to decide whether to investigate his now-sacked telecoms minister.
Singh decided not to investigate him. His party has come to his rescue but there is increasing concern within the ruling Congress party over the handling of the corruption case, especially as the party prepares for key state elections next year.
So far financial markets have largely not reacted to the scandal, except for listed telecoms companies linked to the probe.
The scandal has hit confidence in investing in India, but analysts say most investors will continue going into Asia's third-largest economy because of the vast opportunities in coming years.
The Supreme Court ordered the federal Central Bureau of Investigation (CBI), currently probing the scandal, to report each month on the progress, judges said.
The court has asked federal agents to name the people suspected of corruption in a country, which has long struggled to cut graft.
"Howsover high one may be, the role of such a person should be investigated," the two-judge bench said in a statement.
The decision by the court to oversee the growing probe that has touched the heart of corporate and political India may appease some critics, who say the current investigation lacked independence.
The main opposition Bharatiya Janata Party has threatened to block the February budget session of parliament if a joint investigation did materialise.
Investigators will now have to give the court updates on the progress on the probe into the sale of licences in 2007-08, which a state auditor has said may have lost the government $39 billion in revenues. The Supreme Court also wants the CBI to investigate the sale of licences sold in 2001-07.
Investigators are probing whether Indian companies, which were ineligible to apply for lucrative telecoms licences but still won them at rock-bottom prices took vast sums of money in kickbacks after selling them off to foreign firms.
Indian authorities are also looking into whether to cancel dozens of licences, some which are now held by Norway's Telenor and the UAE's Etisalat . The companies have denied any wrongoing.
India is the world's fastest growing mobile phone market and second largest in terms of subscribers after China. (Writing by Paul de Bendern; Editing by Sanjeev Miglani)