Sprint Nextel Corp posted a wider quarterly loss and revenue fell 10 percent as the No. 3 U.S. mobile service continued to lose valuable monthly bill-paying customers. Its shares fell more than 10 percent.

Strong growth in Sprint's prepaid business and an increase in phone upgrades due to its early June launch of Palm Inc's

Pre phone failed to impress investors because these factors were not enough to offset postpaid losses.

At the end of the day you're looking at a business where usage is rising and revenues are falling and they're not spending any money on the network, said Bernstein analyst Craig Moffett, who noted that Sprint's plan for capital spending of less than $2 billion was lower than expected.

You do have to wonder what the prospects are for Sprint's postpaid business, Moffett said.

While postpaid customer losses of 991,000 showed an improvement from 1.25 million losses in the first quarter, some investors had hoped for a more visible boost from Pre, for which Sprint has exclusive U.S. sales rights into 2010.

It was in the right direction but it was only incremental, Soleil Nelson Alpha Research analyst Michael Nelson said.

In comparison, Sprint's biggest rival, Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc , added 1.1 million new customers in the second quarter and AT&T Inc added 1.4 million customers

Analysts also worried that Verizon Wireless' announcement that it will sell Pre early next year will mean some customers will hold off on buying the phone from Sprint, but Sprint Chief Executive Dan Hesse said he was seeing no signs of this.

Our hope and our plan is that we'll continue to see gradual improvements in our postpaid subscriber numbers, Hesse said in an interview with Reuters. However he stopped short of promising sequential improvements each quarter because he said Sprint was not immune to seasonal trends.

Hesse told analysts on a conference call that Pre had helped mitigate the impact of Apple Inc's latest iPhone launch in June. AT&T has U.S. exclusive rights to sell iPhone.

PREPAID WORRIES

Sprint's bright spot in the quarter was the addition of 777,000 prepaid users, including 938,000 new customers on its iDen network, helped by its Boost Mobile unlimited service.

But investors worried about its increasing focus on prepaid, which tends to be less profitable and less predictable than the postpaid business. The concern was underscored by Sprint's announcement on Tuesday that it would buy out prepaid specialist Virgin Mobile USA .

Hesse said growth prospects were strong for prepaid and that profits could be helped if the company manages to reduce customer cancellations, also known as churn.

If we can improve the churn just a little bit it becomes very profitable very quickly. More and more customers like the budgeting one can do on (prepaid), Hesse said.

Hesse said he eventually expects Sprint's postpaid business to return to growth but did not give a time-frame. For 2009, Sprint said it sees subscriber losses narrowing from 2008.

For the second quarter, Sprint's loss widened to $384 million, or 13 cents per share, from a loss of $344 million, or 12 cents a share, in the same quarter a year earlier.

Excluding unusual items, Sprint's loss would have been 4 cents a share compared with analysts' average expectation for a loss of a penny a share, according to Reuters Estimates.

Revenue fell more than 10 percent to $8.1 billion from $9.05 billion a year earlier in line with analysts' average estimate, according to Reuters Estimates.

Sprint shares fell 48 cents, or 10.4 percent, to $4.11 in late morning New York Stock Exchange trading.

(Reporting by Sinead Carew; Editing by Derek Caney and Maureen Bavdek)

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