* Telecom Italia CEO says "mandatory" to explore deal with Oi
* Brazil remains strategic, but sale of local unit possible
* 9-month core profit down 7.7 pct at 6.59 billion euros
* Sees concrete signs of recovery in recession hit Italian market (Recasts with comments on Brazil consolidation)
By Danilo Masoni
MILAN, Nov 7 (Reuters) - Telecom Italia must explore the possibility of buying or merging with Brazilian telecoms operator Oi, CEO Marco Patuano said on Friday, as the company tries to strengthen the position of its local subsidiary.
Patuano, who is selling assets to fund investment and cut net debt of $33 billion, lost out to Telefonica in a bidding war for Brazilian broadband company GVT this summer, leaving its 67 percent-owned TIM Participacoes in a weaker position than its rivals as fixed and mobile services consolidate.
Sources in October said rivals led by Oi were poised to present an offer for TIM Brasil in a complex break-up deal that would need regulatory approval.
"I think that it is mandatory to explore the possibility of such a big strategic opportunity," Patuano told an analyst conference call when asked about whether the Italian group could be interested in a purchase or a merger with Oi.
"We are not desperate and we don't want to make a deal at any cost," he added on the call after presenting the group's earnings for the first nine months.
Patuano reiterated Brazil was a strategic market and the group would consider selling TIM Brasil only if a highly priced offer was presented. He said any bidder for TIM Brasil, a key source of earnings growth, must also be prepared to take on regulatory risks stemming from any deal.
TIM Brasil has hired Banco Bradesco to evaluate "strategic alternatives" while Oi has commissioned BTG Pactual to seek possible partners in a joint bid for TIM Brasil.
Some investors are betting Telecom Italia could eventually exit Brazil but a small Telecom Italia shareholder group has voiced its opposition to a possible sale, favouring instead a merger with Oi.
Patuano also faces changes in Telecom Italia's shareholder base, with France's Vivendi due to take an 8 percent stake to become the largest investor. Vivendi has not given a view on the Brazil strategy.
Earlier On Friday, Telecom Italia unveiled a 7.7 percent fall in nine-month core earnings blaming weakness in Italy and a slowdown in Brazil but said it saw concrete signs of a domestic recovery.
Telecom Italia pointed to a slowdown in the pace of revenue decline at home thanks to the end of a price war and encouraging trends in broadband subscription.
Europe's ninth-biggest phone company by market value said core earnings, or EBITDA, fell to 6.59 billion euros in the first nine months, broadly in line with analyst expectations.
Revenues fell 9.1 percent to 15.97 billion euros and net debt stood at 26.6 billion at the end of September.
The decline in Italian revenues slowed to 7.2 percent in the nine months from over 8 percent in the first and second quarters thanks to growth in fixed broadband and to stabilisation of user revenues from its traditional mobile phone services.
Core earnings rose at its 67 percent-owned Brazilian unit, helped by cost cutting.
Shares in Telecom Italia rose as much as 2.4 percent in early trade but by 1335 GMT were down 0.97 percent at 0.869 euros.
1 US dollar = 0.8082 euro Editing by Keith Weir and Elaine Hardcastle