* Shares rise over 3 pct from 5.60 offer price
* Sale to net Telefonica as much as 1.45 bln euros
* Europe's biggest listing since July 2011
FRANKFURT/MADRID, Oct 30 (Reuters) - Shares in Telefonica's O2-branded German unit rose over 3 percent on Tuesday following Europe's biggest initial public offering in more than a year, adding to a fledgling recovery in the region's new issues market.
The offering will raise as much as 1.45 billion euros ($1.9 billion) for Spain's Telefonica to trim its huge debt, and is a positive step for an IPO market which has struggled for months amid Europe's debt crisis and sluggish economic growth.
Telefonica said on Monday it was selling a 23 percent stake in Germany's smallest mobile operator, including an overallotment option, for 5.60 euros a share. The price was in the lower half of Telefonica's original 5.25-6.50 euro range, which it narrowed twice during bookbuilding.
Telefonica Deutschland shares began trading at 5.70 euros on Tuesday and rose to 5.80 euros by 1230 GMT, valuing the unit at around 6.4 billion euros.
``We have seen a re-emergence of some sort of IPO market. The recent transactions, the fact they have gone well, is clearly presenting a positive backdrop,'' said one banker not involved in the deal, referring to other recent listings like Germany's Talanx and Britain's Direct Line.
``People are looking to the markets for next year ... but the IPO market continues to be very challenged and that reflects the backdrop of the broader market.''
As of Friday, Europe had seen just $9 billion raised from IPOs, a 75 percent decline on the same period last year.
The next big potential IPO in the region could be Russian mobile phone firm Megafon.
``There is some good appetite for the shares,'' a Frankfurt-based trader said of Telefonica Deutschland, adding the fact Telefonica moved to the bottom half of the pricing range helped.
For Telefonica, the listing aims to protect its prized credit rating despite Spain's economic crisis.
Telefonica pitched its German unit to investors as a promising challenger to larger rivals Vodafone and Deutsche Telekom with growth potential as consumers increasingly adopt smartphones to surf the web.
It pledged to pay out 500 million euros in dividends on this year's earnings and said higher payouts were possible in future.
The dividend pledge was key to attracting investors, said sources involved in the listing, especially since other European telecom groups, including Telefonica itself, have scrapped or cut payouts this year.
Nonetheless, some investors were concerned about the relatively small free float and being minority shareholders faced with a powerful owner in Telefonica.
The listing of Telefonica's German operation, its third-largest in Europe after Spain and Britain, is the biggest IPO in Europe since Spain's Bankia raised 3.1 billion euros in July 2011.
Telefonica plans to use proceeds from the sale, which is part of a programme of cost cuts and asset sales, to reduce its 58 billion euros of debt.
``Investors appear to have demanded a discount given Telefonica's position as a forced seller, the uncertainty surrounding its future plans for Telefonica Germany, limited prospects for in-market consolidation and recent comments by local competitors indicating a deteriorating pricing environment,'' said analysts at Espirito Santo Investment Bank.
Telefonica Deutschland held merger talks with No.3 German player KPN earlier this year, but they failed over price and structure.
The unit's executives have said it would be interested in sharing network infrastructure such as mobile towers with competitors to cut costs and boost profits, but CEO Rene Schuster said on Tuesday no talks were currently underway.
Competition in the German mobile market appears to be tightening in recent months. KPN, which posted weaker quarterly results dragged down by German unit E-Plus, predicted prices would continue to be under pressure as budget conscious Germans sought to save money on their monthly mobile bills.
Telefonica reports results on Nov. 7.