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MILAN, July 6 (Reuters) - French tycoon Xavier Niel's decision to turn his back on Telecom Italia has doused long-running speculation the Italian phone group could participate in European consolidation, sending its shares plunging to their lowest level since October 2013.
On Tuesday, French telecoms group Iliad said its founder Niel would sell "in the next few weeks" options he had in Telecom Italia, which could have handed him a 15 percent stake. That would have made him the biggest shareholder after French media group Vivendi's 24.7 percent.
His decision to sell came after Iliad agreed to create a fourth Italian mobile telecoms operator, smoothing the way for CK Hutchison Holdings to merge its 3 Italia with Vimpelcom's Wind.
"Telecom Italia's speculative appeal has waned," a Milan-based trader said.
Shares in the company fell more than 11 percent on Wednesday, the top loser on Milan's blue-chip index.
The company has been at the centre of feverish talk since Niel bought the options last year, fueling speculation about his and Vivendi's motives at Telecom Italia.
The Italian company has long been seen as a takeover target because it is smaller than many of its European rivals - it is only present in its home market and Brazil - and has first-mover advantage in Italy's nascent ultrafast broadband market.
Analysts said the creation of a fourth player would have only a moderate impact on the mobile sector in Italy given that pricing is already low in a saturated market, making it difficult for Iliad to pursue the aggressive strategy it has adopted in France.
Iliad's entry, however, also dashes hopes that a tie-up between 3 Italia and Wind would end the long-running price war and ease the pressure on Telecom Italia, at a time when the former state phone monopoly is speeding up investments in ultra-fast broadband to upgrade its aging network.
JP Morgan downgraded the stock to "neutral" on Wednesday from "overweight" and cut its price target to 0.85 euro from 1.40 euros, citing the additional overhang for Telecom Italia. (Reporting by Stephen Jewkes and Agnieszka Flak; Editing by Susan Fenton)