(Corrects paragraph seven to show Aurelius said its plan was opposed by a group of bondholders, not a larger group of bondholders)
By Guillermo Parra-Bernal and Brad Haynes
SAO PAULO, Sept 15 (Reuters) - NII Holdings Inc, the parent of Nextel operators in Latin America, filed for U.S. bankruptcy protection on Monday after struggling for years with debt, fierce competition in Brazil and Mexico, and a dispute with a U.S. hedge fund.
The company filed a voluntary petition for so-called Chapter 11 in U.S. Bankruptcy Court in New York, according to a filing.
The decision should allow Reston, Virginia-based NII Holdings to restructure debt with creditors by turning them into shareholders, sources with direct knowledge of the situation said. NII Holdings operates in several countries in Latin America under the Nextel brand.
The Chapter 11 filing could also help the company implement a more sustainable business model with a focus on Brazil and Mexico, its main markets. Chapter 11 is a form of bankruptcy that protects a company from its creditors while it reorganizes its business affairs and assets for a limited period.
NII said in court documents that it had received a notice in March from Aurelius Capital Management alleging it had defaulted on $500 million of unsecured notes. The hedge fund, known for its battles with Argentina over that country's defaulted bonds, argued a 2009 restructuring of NII's unsecured notes constituted fraudulent transfers.
Aurelius said it had presented a plan to NII that would convert the company's debt into equity and raise fresh capital by selling new stock in the company, while deferring some disputes until after NII emerged from bankruptcy.
Aurelius said in a statement its plan was opposed by a faction of bondholders.
NII said it anticipated continued negotiations with Aurelius and other creditors toward a plan to bring the company out of bankruptcy.
In the court filing, NII Holdings listed assets of $2.88 billion and liabilities of $3.47 billion, adding that more than 500 investors held five types of senior unsecured bonds totaling $4.35 billion as of June 30.
Creditors included a vehicle owned by American Tower Corp's Brazilian unit and China Development Bank Corp , both of which extended guarantees to NII Holdings.
Shares of NII Holdings closed at 8.3 cents each, down 36.6 percent on Nasdaq. The price on NII's 10 percent bond due in August 2016 jumped 4 percentage points on Monday to 24 cents on the dollar, according to FINRA prices.
The stock is down 96 percent this year. The 2016 bond traded at around 54 cents on the dollar at the end of last year.
NII Holdings has been losing customers and suffering a decline in average revenue per user as America Movil SAB , Spain's Telefonica SA and TIM Participações SA offered better coverage for increasingly popular smartphones.
NII Holdings is struggling to regain market share, even after regulators exempted it from paying interconnection fees to larger rivals.
The company warned last month that it could file for bankruptcy protection after reporting its ninth quarterly loss in a row. The company ended the second quarter with $1 billion in cash, a net recurring loss of $629 million and a reduction of 77,000 subscribers in its client base.
NII Holdings hired investment banks UBS AG and Rothschild in March to advise on a potential sale and a debt restructuring, respectively.
A court hearing to approve a series of routine "first-day" requests was scheduled for 2 p.m. EDT on Tuesday in New York. (Additional reporting by Tom Hals; Editing by James Dalgleish, Grant McCool and Bernard Orr)