* RCom says agrees with Aircel to drop merger
* Cites regulatory delays and legal uncertainties for move
* RCom had net debt of $6.8 bln at end of March
* Bonds slip only marginally as subordination risk diminishes (Adds bonds reaction and analyst comment)
MUMBAI, Oct 2 (Reuters) - Embattled Indian telecom company Reliance Communications Ltd faced another setback on Sunday after a deal to merge its wireless business with smaller rival Aircel was called off, raising fresh doubts about its debt-repayment plans.
The company, widely known as RCom, said it had agreed with Aircel, a subsidiary of Malaysia's Maxis Communications , to call off the proposed deal due to regulatory delays and legal uncertainties.
Controlled by billionaire Anil Ambani, RCom had net debt of 443.45 billion Indian rupees ($6.79 billion) at the end of March. The company has earned a temporary reprieve from its lenders, who have agreed to a standstill on its debt obligations as part of a planned debt restructuring.
RCom has been trying to reduce its debt by 250 billion rupees by merging its wireless business with Aircel and by selling a stake in its mobile masts arm to a unit of Canada's Brookfield Asset Management.
RCom had said in April the deal with Aircel would reduce its debt and deferred spectrum liability by 200 billion rupees.
The collapsed deal raises further doubts about the company's ability to repay debt, the head of an institutional investor in RCom told Reuters, declining to be identified.
"Will the investors have to take a hit? Will there be any kind of haircut to all the lenders in RCom? Those questions will also come," the person added.
Maxis did not immediately respond to a request for comment. Aircel and Brookfield were not immediately reachable for comment.
Indian markets are closed for a public holiday on Monday and shares in RCom will only resume trading on Tuesday.
But RCom's overseas traded bonds fell marginally in early deals on Monday, with some analysts saying bond holders are now in a better position than before as subordination risk has diminished. Its bonds due 2020 were indicated at 53/54 cents on the dollar, showing the bid down by 3 points.
"While sounding negative, the development is actually positive to RCom note holders, because the merger if successful, would have put their claims in a subordinated position. At least RCom note holders now can expect slightly higher recovery value with the wireless assets in place instead of being spun off," said Trung Nguyen, analyst at Lucror Analytics.
RCom said in a statement it would look to monetize its spectrum through trading and sharing arrangements and continue to implement the monetization of its tower and fiber assets.
The company already shares its airwaves with Reliance Jio Infocomm, the network operator backed by Ambani's older brother and India's richest man, Mukesh.
RCom has been hit by free voice and cut-price data plans offered by Reliance Jio - the mobile market's newest entrant.
The collapse of the deal with Aircel comes after the local arm of Sweden's Ericsson filed a plea with an Indian insolvency court against RCom last month.
Ericsson, which signed a seven-year deal in 2014 to operate and manage RCom's nationwide network, is seeking a total of 11.55 billion rupees from RCom and two of its subsidiaries.
Worries over the company's ability to repay debt have led to a series of downgrades by ratings agencies and the company's stock has plummeted nearly 44 percent so far this year, compared with a nearly 20 percent rise of a broader Mumbai market. ($1 = 65.3050 Indian rupees) (Reporting by Abhirup Roy and Sankalp Phartiyal; Additional reporting by Devidutta Tripathy, Umesh Desai in HONG KONG and Liz Lee in KUALA LUMPUR; Editing by Mark Potter and Muralikumar Anantharaman)