* Brazil antitrust watchdog rules against Telefonica
* Decision could speed up fight over TIM Participacoes
* Telefonica prefers sale of Brazil unit, Fossati against
* TIM CEO says no way Telefonica can force sale
* Shareholder vote on Dec 20 over removal of Telecom board
MILAN, Dec 5 (Reuters) - Rebel Telecom Italia investor Marco Fossati said on Thursday he was opposed to the enforced sale of the company's Brazilian mobile business, as demanded by a local regulator, arguing this would depress its multi-billion euro value.
Telecom Italia's 67 percent stake in TIM Participacoes (TIM Brasil) has become an issue since TIM Brasil's biggest rival, Spain's Telefonica, agreed a deal in September to gradually take over Telecom Italia's controlling shareholder group, Telco.
Brazil's competition regulator Cade ruled on Wednesday that Telefonica must therefore withdraw from its indirect and direct stake in TIM Brasil or seek a partner for Telefonica Brasil's Vivo business, the country's largest mobile carrier with a 28.7 percent market share against TIM Brasil's 27.2 percent.
Brazil's regulatory decision accelerates a potential fight between Telefonica and other Telecom Italia shareholders including Fossati over the future of TIM Brasil, whose market value exceeds $11 billion.
The two sides are divided on whether the Italian group should exit Brazil to help pay down 28 billion euros ($38 billion) of net debt, which remains high despite asset sales in Argentina and a convertible bond issue.
"The solutions imposed by Cade on Telefonica mustn't damage Telecom Italia. The solution cannot and must not be the forced sale of TIM," Fossati, Telecom Italia's second biggest single investor after Telco with his 5 percent stake, said in a statement from his Findim holding company.
Telefonica has not yet decided how it will handle the situation, saying on Wednesday it was studying the ruling.
Sources familiar with the matter have previously said Telefonica would prefer to sell TIM Brasil via a break-up among existing mobile players in Brazil, which could take place in the second half of next year.
Analysts said Telefonica was unlikely to agree to take on a partner for Vivo because the unit generates nearly a quarter of group operating profit. In 2010 Telefonica bought out Portugal Telecom's stake in Vivo for 5.5 billion euros.
TIM Brasil's CEO Rodrigo Abreu said on Thursday there was no way Telefonica could force the sale of TIM but if an offer was made his company would have to consider it.
"If there was an interesting proposal there would still have to be a process open to the market. And in any case there would have to be no issues of regulatory or competitive risk left for TIM," he told reporters in Rio de Janeiro.
Shares in Telecom Italia ended down 2.6 percent on Thursday, while Telefonica's closed down 1.5 percent. At 1906 GMT TIM Brasil's shares were up 1.9 percent, while Telefonica Brasil was up 2 percent.
For his part, Fossati says that not only would an enforced sale of TIM for regulatory reasons result in a poor valuation but it would also remove Telecom Italia's main prospect for growth without solving its debt problems.
Fossati has also criticised the deal which gives Telefonica the option to gradually take over Telco, the investment consortium vehicle that controls Telecom Italia.
He is seeking to remove Telecom's board at a Dec. 20 shareholder meeting and influential proxy shareholder adviser ISS recommended on Wednesday that institutional investors back that proposal.
A trader who declined to be named also said Telecom Italia shares were being hit by investors' fears of a forced sale of TIM Brasil.
"The timing implied by the Brazil antitrust ruling is not clear yet. But the market is probably thinking about a fast sale of TIM, which means that the price they get could be less than the valuation most people have in their books," the trader said.
Following Cade's ruling analysts at Bernstein Research predict that a vehicle company known in Brazil as a "Comisario Mercantil" will be formed shortly to negotiate a possible break-up of TIM Brasil among its three rivals, Telefonica Brasil, America Movil, and Oi.
"We think that this vehicle is likely to bid for TIM Brasil early in 2014," they said.
Telecom Italia's chief executive Marco Patuano said last month TIM Brasil was a core asset and he would consider selling it only at a "convincing" price.
A source familiar with the matter has said Telecom Italia would want to get at least 9 billion euros for its 67 percent stake in TIM Brasil.