Apple Inc accused Nokia of anti-competitive practices and patent infringement on Friday, escalating a legal battle as they fight for market share in smartphones.

Analysts say the dispute, potentially involving hundreds of millions of dollars in annual royalties, reflects the shifting balance of power in the mobile industry as cellphones morph into handheld computers that can play video games and surf the Web.

Apple, which makes the iPhone and iPod, was responding to a suit that arch-rival Nokia filed in October. That suit accused Apple of infringing 10 Nokia patents for technologies such as wireless data, speech coding and security.

The countersuit heats up the fight between a rapidly growing Apple and the world's largest maker of cellphones. While relative newcomer Apple trails Nokia in cellphone shipments, its iPhone has gained a lot of ground against the market leader in the smartphone segment.

Apple, which entered the industry in mid-2007, overtook Nokia last quarter as the cellphone maker generating the highest total operating profit.

History is littered with industry incumbents being surprised by newcomers since established players often fail to deliver customer value beyond the basic utility of their initial products, said Steven Nathasingh, chief executive of researcher Vaxa Inc.

Apple has bedazzled Nokia and others like Sony by redefining all things mobile and making it generationally stylish. A combination that is hard to beat, he said.

Analysts say Nokia and Apple could take years to resolve their patent dispute.

In court documents, Apple denied infringing the Nokia patents. It said the patents asserted by Nokia were not essential for technology standards used in cellphones. The countersuit was filed in the same Delaware court where Nokia brought its case, Apple said.

SHADES OF MOTOROLA

Since Motorola Inc launched a similar attack on Nokia in 1989, the Finnish company has built one of the industry's widest patent portfolios. Only Ericsson and Qualcomm have comparable portfolios.

About 40 companies have entered into license agreements with Helsinki-based Nokia, including virtually all the leading handset vendors -- except Apple.

Apple said that Nokia had engaged in anti-competitive behavior and did not live up to commitments to license its own technology at fair and reasonable terms.

According to Apple's complaint, Nokia and Apple began licensing negotiations in late 2007 related to certain Nokia wireless communications patents.

In subsequent years, Apple said, Nokia boosted royalty rates for the patents to as much as three times higher than what was previously proposed and demanded that Apple grant Nokia a license to certain of its patents as part of the compensation.

Other companies must compete with us by inventing their own technologies, not just by stealing ours, Bruce Sewell, Apple's General Counsel, said in a statement.

Jeffrey Faucette, Vice Chair of Howard Rice Nemerovski Canady Falk & Rabkin's Intellectual Property litigation department, said the two may have sharply differing views about whose technology is central to the iPhone.

In the old perspective, you'd say the piece that lets you make calls is the most valuable, so you'd get a license fee that's commensurate with that, Faucette said.

Now you look at the iPhone, it's hard to say specifically what that device is for. It changes daily and hourly depending on what the newest app is that people are crazy about.

The 13 patents Apple cited in its countersuit involve various computing technologies including graphical interfaces, teleconferencing, power conservation and touch screen technologies -- features popularized by its iPhone.

Apple cited Nokia's E71, sold by AT&T Inc, and its new top-end N900 model as products that infringe its patents.

In response, Nokia said the countersuit does not change anything fundamental in the original case, but noted that it would take time to study the suit.

They have infringed our patents since the iPhone launch in 2007, a Nokia spokesman said.

Apple shares were down 1 percent at $194.67 on Nasdaq. Nokia's US shares were up 1.4 percent at $12.73.

While the battle may drag on, analysts see the companies eventually coming to a licensing agreement.

We can now look forward to a lengthy tit-for-tat exchange between Apple and Nokia as they grind out a deal, said Ben Wood, research director at CCS Insight.

(Additional reporting by Sinead Carew in New York, editing by Edwin Chan and Carol Bishopric)

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