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UPDATE 4-Ten U.S. states sue to stop Sprint-T-Mobile deal, saying consumers will be hurt

Diane Bartz and David Shepardson

will be hurt@ (Adds details from complaint, updates shares)

WASHINGTON, June 11 (Reuters) - Ten states led by New York and California have filed a lawsuit to stop T-Mobile US Inc's $26 billion purchase of Sprint Corp, warning that consumer prices will jump due to reduced competition.

The complaint, announced by the New York attorney general's office, was filed in the U.S. District Court for the Southern District of New York. The New York attorney general office will hold a news conference this afternoon.

Attorneys general from the ten states have been investigating the deal, which would reduce the number of nationwide wireless carriers to three from four. The companies have pledged not to boost rates for three years.

The reduced competition would cost Sprint and T-Mobile subscribers more than $4.5 billion annually, according to the complaint.

"Direct competition between Sprint and T-Mobile has led to lower prices, higher quality service, and more features for consumers. If consummated, the merger will eliminate the competition between Sprint and T-Mobile," the states said in the complaint.

T-Mobile, whose parent company is Deutsche Telekom AG , and Sprint, controlled by Japan's SoftBank Group Ltd , did not comment. A spokeswoman for the New York attorney general declined to comment.

Shares of Sprint dropped 4.9% at $6.65 while T-Mobile was down 1.5% at $75.52..

While AT&T and Verizon dominate the overall U.S. wireless market, T-Mobile is the most popular among customers who make less than $75,000 per year, and Sprint's Boost Mobile prepaid brand counts 83 percent of its users in that income range, according to Kagan, S&P Global Market Intelligence data.

Critics of the deal fear it will likely lead to higher prices for the poorest Americans, many of whom use prepaid wireless plans.

The companies have offered to sell Boost to reduce the combined company's market share in the prepaid business. They have also indicated they were considering divesting wireless spectrum.

The states' complaint also said that divesting Boost would not resolve competitive concerns since Boost would be dependent on another carrier to provide network access, meaning that it is not independent.

The two companies have been in regular contact with regulators as they lobby for approval. Sprint Chief Executive Officer Marcelo Claure and John Legere, his counterpart at T-Mobile, met with Justice Department officials on Monday, according to a source familiar with the matter.

If the states' lawsuit goes forward, the courts would have the last say, not the Justice Department, said Blair Levin, an analyst with New Street Research, in a note on Tuesday following the development, which Reuters first reported.

The next two big steps will be determining the position of Makan Delrahim, head of the antitrust division, and the identity of the judge assigned to the states' lawsuit, Levin wrote.

State attorneys general often participate in lawsuits aimed at stopping mergers but rarely go it alone.

The deal has won the backing of a majority of the Federal Communications Commission. The U.S. Justice Department's antitrust division staff has recommended the agency block the deal, but no final decision has been made. (Reporting by Diane Bartz, David Shepardson, Karen Freifeld; Additional reporting by Angela Moon and Sheila Dang in New York; Editing by Chris Sanders, Steve Orlofsky and Jeffrey Benkoe)