Telmex, Mexico's leading fixed-line phone operator, posted an 11.9 percent drop in third-quarter net profit on Wednesday as growing competition and an economic slump led to canceled phone lines.

Telmex, controlled by billionaire Carlos Slim, said its net profit in the July-September period was 4.79 billion pesos ($355 million).

With Mexico beginning to emerge from a deep recession, Telmex, which controls 80 percent of the country's fixed telephone lines and is the leading broadband Internet provider, posted a 5 percent drop in sales to 29.54 billion pesos for the quarter.

Telmex's results were marginally below market expectations. Analysts polled by Reuters on average forecast a 10 percent drop in net profit and a 3 percent decline in revenue.

Earnings before interest, tax, depreciation and amortization fell 9.8 percent, year over year, to 12.96 billion pesos.

A former government monopoly, Telmex is grappling with new competition as cable television companies begin providing telephone and Internet service. In addition, some customers are abandoning Telmex's fixed-line telephones in favor of cell phones.

Telmex lost 69,000 telephone lines in the quarter, leaving it with 17.35 million.

SHIFTING FOCUS

To make up for its dwindling traditional telephone business, Telmex is scrambling to expand its Internet access service.

Telmex's added 403,000 broadband clients during the quarter, reaching a total of 6.303 million.

Revenue from Telmex's Internet access business rose 18 percent in the third quarter, while local, long-distance and interconnection revenues all fell.

Telmex's Internet and corporate networking businesses now account for a quarter of its total sales.

Telmex shares slipped 1.13 percent to end at 11.34 pesos before the results were released.

Even as it faces increasing competition from smaller players such as Axtel, Maxcom and cable operators, Telmex is under attack from Mexico's anti-trust watchdog.

Last week, Mexico's competition regulator ruled Telmex is a dominant player in wholesale services related to long distance. That decision as well as previous rulings opens Telmex to the possibility of increased regulation.

Also threatening Telmex, the lower house of Congress approved a proposal on Wednesday to create a 3 percent tax on telecommunications services, although the plan has yet to be passed by the Senate.

Some analysts say Telmex may a difficult time passing the tax on to consumers and may have to absorb the cost of the tax itself.

($1 = 13.5035 pesos at end of September)

(Reporting by Noel Randewich, additional reporting by Tomas Sarmiento)

Mexico