UPDATE 1-Minnesota judge dismisses telecom bond challenge

(Adds comment from TDS Telecommunications)

CHICAGO, Oct 9 (Reuters) - A Minnesota state judge has dismissed a challenge to $26.4 million of revenue bonds sold by Monticello, Minnesota, to finance a fiber optic network.

In a ruling on Wednesday, Wright County District Court Judge Jonathan Jasper said the city had authority under state law to fund the project with bonds.

"The project is not different in character from other utilities the municipality is authorized to build through the issuance of bonds," the ruling stated.

The lawsuit against Monticello was filed in May by Bridgewater Telephone Co, the Monticello-based subsidiary of TDS Telecommunications Corp, which in turn is a unit of Chicago-based Telephone and Data Systems Inc (TDS.N).

Drew Petersen, a TDS spokesman, said in a statement on Thursday that the ruling was under review and that the company has 30 days to decide on whether to file an appeal.

"As we have stated numerous times, we take this litigation very seriously and have always viewed this case as purely a matter of questioning whether or not the city has statutory authority to issue revenue bonds to build a fiber network and compete with private enterprise," Petersen said.

Monticello, which sold the unrated bonds in May through Oppenheimer & Co, parked the proceeds in an escrow account pending a final ruling.

Bridgewater's lawsuit contended the issuance of tax-exempt revenue bonds for a "fiber-to-the premises" broadband communications network was not allowed under Minnesota law. It also claimed that the city failed to hold a referendum on the bond issue and unlawfully planned to use some bond proceeds for operating expenses.

But the judge found the city did not exceed its authority under state law.

Bridgewater was building its own fiber optic network that would compete with the system envisioned by Monticello and a company spokesman had said that would make the city TDS Telecom's chief regulator and competitor. (Reporting by Karen Pierog; Editing by Theodore d'Afflisio)