* Proxy adviser ISS recommends vote for board removal
* Rebel investor says fight will continue if removal rejected
* Shareholder meeting scheduled for Dec. 20
* Telco holding group said would vote against board removal (Adds rebel investor comments, details)
By Danilo Masoni and Stefano Bernabei
MILAN/ROME, Dec 4 (Reuters) - An activist shareholder campaign to reform Telecom Italia won traction on Wednesday as influential proxy adviser ISS recommended institutional investors back a proposal to remove the company board at a meeting on Dec. 20.
The potentially disruptive vote comes as Italy's biggest phone company by market share tries to revive years of sluggish growth and share underperformance while at the same time cutting its 28 billion euros of debt.
Businessman Marco Fossati, Telecom Italia's No.2 investor through his 5 percent stake, and small shareholders group ASATI have proposed to oust the Italian phone company's board, which they say caters more to the interests of core shareholders such as Spain's Telefonica than to other investors.
Holding company Telco, which owns 22.4 percent of Telecom Italia, is controlled by Telefonica together with Italian financial companies Assicurazioni Generali, Intesa Sanpaolo and Mediobanca.
If a majority of shareholders ditch the current board, led by Chief Executive Marco Patuano, they would have to choose a new slate of directors. Fossati's family holding company Findim is backing a list of seven new directors presented by Italian asset managers' association Assogestioni.
"On balance the removal of the board and the presence of the Assogestioni slate on the Telecom Italia board would likely prove beneficial to long-term shareholder value," proxy advisers ISS said in a report for clients seen by Reuters. "Hence, a vote FOR this item is warranted."
Miguel Carrasco, managing director at proxy solicitor Proxycensus estimates that institutional investors following the ISS recommendations could exceed 9 percent of the votes at the next meeting of Telecom Italia, assuming that more than half of the company capital is represented.
Yet, top shareholder Telco has already said it would vote against Fossati's proposal.
Speaking at a conference in Rome, Fossati said there might not be enough support to approve his proposal but vowed to continue to fight to improve governance at Telecom Italia. Fossati's holding company has lost more than half of the money it invested in Telecom Italia since 2007. The same is true for thousands of retail investors.
"We might not have the number of votes (to remove the board)... but we are committed," Fossati said on the sidelines of the conference. "This will not finish in December.
The ISS report and those from other proxy advisors will influence the vote of foreign institutional investors, which represent nearly 50 percent of Telecom Italia's capital base, on Dec. 20.
"Further more if Glass Lewis and other proxy advisors such as Manifest & Pirc follow suit, then Telecom could be in for a real shock," Carrasco said.
But small proxy advisor firm ECGS has recommended voting against Fossati's proposal, citing risks of a lack of leadership although it acknowledged a possible conflict of interest for Telefonica, which competes against Telecom Italia in Brazil.
The dissident investors are concerned that Telefonica could force a sale of Telecom Italia's prized Brazilian unit TIM Pariticipacoes. They have also criticised Telecom Italia's recent issue of a convertible bond, saying it penalised minority investors.
If the activist campaign fails, Telecom Italia will continue with a strategy outlined last month by CEO Patuano for assets sales to fix its balance sheet and fund investments.
Early data from an electronic voting platform showed last week that funds owning more than 60 million Telecom Italia shares, or about 0.5 percent of the total, were voting against the proposed board removal, while holders of over 20 million shares abstained. None voted in favour. (Additional reporting by Maria Pia Quaglia, Editing by David Holmes and David Evans)