* Prospect of Brazil mobile consolidation comes back to fore
* Telecom Italia CEO says will be "pragmatic, rational"
* Oi's financial health, regulatory issues remain obstacles
By Leila Abboud
BARCELONA, Nov 12 (Reuters) - Telecom Italia is open to considering a merger or sale of its Brazilian mobile business next year with domestic leader Oi, if the latter can clean up its debt and regulatory issues, Chief Executive Marco Patuano said.
The Italian carrier, which owns Brazil's second-biggest mobile operator Tim Participacoes, has not yet decided whether it would want to keep control in any combination with Oi, and is open to all options, he added.
The four-player mobile market in Brazil has been hit hard by the ongoing recession and decline of the real. The possibility of consolidation has come back to the fore in recent weeks after Russian investment company Letter One offered to inject up to $4 billion into Oi if a deal with Tim Brasil could be reached.
Letter One, which is backed by Russian billionaire Mikhail Fridman, has entered into seven months of exclusive talks with Oi to that end.
Sector executives from three of the four Brazilian telecoms companies said at an industry conference in Barcelona this week that the outcome would depend largely on when Oi could reduce its debt and rules are relaxed on the fixed-line telephony market over aspects such as universal coverage obligations.
The government may have a proposal to change Brazil's fixed-line telephone concessions rules in about 10 weeks, said Oi Chief Executive Officer Bayard Gontijo on Thursday.
Telecom Italia's Patuano said it then remained to be seen whether Oi could find a solution to its financial issues.
"Many people say that the financial structure of Oi needs to be worked out in one way or another in 2016. Working on financial structure and not working on the industrial side of it would be a missed opportunity," he said at the investor conference held by Morgan Stanley, referring to the idea of a tie-up.
"So I think 2016 will be the magic year for Oi to find a solution whatever that is."
A combination of Tim and Oi would bring together the owner of the largest land-line network in Brazil with the second-biggest mobile carrier, creating an integrated company better armed to compete with Telefonica and America Movil.
Such a deal has been studied by both sides several times in the past few years but Oi's weakness and Telecom Italia's wariness about parting with a valuable asset has made a deal difficult, analysts have said.
"It was a difficult deal when we looked at it before, and it is still a difficult one," said Patuano. "But the attitude of Telecom Italia has been and will remain very pragmatic. We will consider all the options, and today that includes evaluating what happens with Oi."
Patuano said that he had spoken to executives from Letter One before they announced their interest in Brazil, calling the discussions informal and introductory. He said no direct talks had begun with Oi.
Some remain sceptical that the long-awaited mobile consolidation will actually occur.
Carlos Garcia Moreno, the chief financial officer of America Movil which owns Brazil's largest pay-TV operator and third-biggest mobile group, said Oi's debt was "a poison pill for any strategic investor."
"I don't know if anything can really happen with Oi in the state that it is in," said Garcia Moreno at the conference.
"For anyone who wants to take over Oi, it is basically like tying yourself to a cannon ball and jumping into the water." (Additional reporting by Guillermo Parra-Bernal; Editing by Elaine Hardcastle)