UPDATE 2-German court throws Liberty Global takeover of KabelBW into doubt
* Court refers decision back to cartel office
* UnityMedia says will use all legal means to fight decision
* Ruling means merger may need to be unwound
DUESSELDORF, Germany, Aug 14 (Reuters) - A German higher regional court reversed an approval by the country's cartel office for Liberty Global's 3.16 billion euro ($4.2 billion) acquisition of KabelBW, throwing the now-completed merger into doubt.
The court in Duesseldorf ruled that the German antitrust regulator will have to look at the case again, to either block it or approve the purchase applying stricter conditions than previously.
The ruling could ultimately mean that the whole merger, which was approved in 2011 and completed in early 2012, has to be unwound.
It rattles a sector already undergoing major changes.
Vodafone in June agreed to buy Kabel Deutschland for 7.7 billion euros ($10 billion) and Dutch telecoms group KPN last month agreed to sell its German unit to Telefonica for 8.1 billion euros
The cartel office, which said it would study the ruling before deciding about any next steps, had approved the acquisition at the end of 2011 only after imposing far-reaching conditions because Liberty already owns Germany's second-largest cable operator UnityMedia.
Germany's biggest telecoms group Deutsche Telekom had challenged the approval decision. The court had already voiced concerns over the deal in a June hearing.
The court did not allow for an appeal of the decision, but UnityMedia can file a complaint with a higher court, Germany's Federal Court of Justice, to be allowed to appeal.
"The merger implies that KabelBW as the only potential competitor has been taken out of the market," the court's presiding judge Juergen Kuehnen said. "Potential competition has been eliminated."
UnityMedia said it would use all legal means available to fight the court's decision.
According to antitrust lawyer Frederik Wiemer of German law firm Heuking Kuehn Lueer Wojtek, who is not involved in this case, the court looked at several regional markets within Germany while the cartel office had mainly considered the national market.
"Certainly this ruling will have dramatic consequences," he said. "If this decision is upheld by a higher court, the merger will have to be unwound. I wonder whether this is actually possible."
Liberty Global and German cable industry leader Kabel Deutschland have been winning customers from Deutsche Telekom with their expansion into broadband.
Their cable lines, designed to deliver TV to homes, have been upgraded to carry voice calls and Internet at speeds often five times faster than competing services offered by Deutsche Telekom and others.
Liberty has been the most active buyer in Europe in the last few months, snapping up Britain's Virgin Media in February and increasing its stake in Dutch group Ziggo.
In February, Germany's competition regulator blocked Kabel Deutschland's bid to take over smaller Berlin-based cable group Tele Columbus for 618 million euros.
In prior German cable deals regulators have required remedies to consolidation such as making it easier for housing associations to switch TV providers and ending the encryption on cable delivery of free-to-view terrestrial television programmes.