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UPDATE 2-EU opens subsidy probe into Chinese 'dongles'

* Third probe into mobile wireless modem imports from China

* Chinese exporter denies illegal aid

* China “seriously concerned” - Chinese state news agency

(Rewrites, adds Chinese exporter’s comment)

BRUSSELS, Sept 16 (Reuters) - The European Commission has launched an inquiry into the legality of Chinese state subsidies for mobile wireless modems, it said on Thursday, raising the pressure on Chinese exporters targeting the EU’s market in high-tech goods.

The investigation follows a complaint by the European Union's sole producer of wireless modems, Option OPIN.BR, the EU's executive said in its official journal.

It brings to three the total number of investigations currently underway against Chinese-made ‘dongles’ -- the first time the EU has launched three inquiries into one product and comes as China becomes increasingly competitive with EU high-tech goods producers.

It is only the second time that the EU has challenged Chinese state subsidies.

The first case, which is continuing, concerns alleged subsidies for the Chinese paper industry.

Europe is also looking at whether Chinese modem makers are dumping their exports on the EU market, and whether the surge in exports to the EU should prompt the bloc to impose limits or additional tariffs on their goods.

Option, which makes cards, USB sticks and embedded modems for surfing the net on laptops, brought the complaint in August. [nLDE67U1W5]

Its commanding lead in the market, particularly in Europe, has come under threat particularly from China's Huawei Technologies HWT.UL and ZTE Corp 0763.HK. China estimates it exports $4 billion worth of the modems to Europe each year.

CHINESE REACTION

Huawei, which supplies modems and telecoms infrastructure equipment to operators including Deutsche Telekom DTEGn.DE, Telefonica TEF.MC and Vodafone VOD.L, hit back against what it called a "heavily burdensome" and "unprecedented" triple probe, warning it would hurt EU telecom operators and consumers.

“We believe Option’s complaints are wholly inaccurate and reject any accusations of injurious dumping or illegal subsidies,” Huawei said in a statement, adding that Option was itself benefiting from low Chinese production costs.

“It is puzzling that Option should file a complaint against Chinese producers, when it has by its own admission moved all its production to China,” the company added.

A spokesman for the Chinese Ministry of Commerce said the EU’s new inquiry ran counter to a “deepening China-EU friendship” and that Beijing would take corresponding measures “in due time,” China’s official Xinhua News Agency said.

Option last made a net profit in the fourth quarter of 2007. Analysts have said it has struggled to shift from what was once a high-margin, low-volume specialist business to a more commoditised market such as for plug-in USB modems.

The Commission has up to 13 months to impose extra tariffs, which could be in place for up to five years. It could put temporary duties in place by January 2011.

Chinese diplomats in Brussels could not be reached for comment. (Reporting by Philip Blenkinsop and Juliane von Reppert-Bismarck; Editing by Mike Nesbit, Greg Mahlich)

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