Switzerland's competition watchdog will examine closely the planned merger between France Telecom's Orange and Danish-owned Sunrise to ensure the grouping does not dominate the Swiss mobile market.

Along with Swisscom , Sunrise and Orange are the main players in Switzerland's mobile phone market. The planned merger, with a market share of 40 percent, would reduce the number of competitors to two from three, the watchdog, ComCo, said on Monday.

There are signs the planned merger could lead to or increase a market dominant position in various areas of mobile telecommunications, ComCo said, adding that it would conclude its examination within four months.

France Telecom announced in late November it would pay 1.5 billion euros ($2.15 billion) for a 75 percent stake in a new company with the assets and clients of Sunrise, owned by Denmark's TDC , and Orange.

The deal, which is expected to close in May 2010, comes as European telecom operators are seeking ways to cut costs and improve profitability in mature markets with few growth prospects.

One solution for telecom groups is to buy out rivals to reduce competition in markets.

TDC is 88-percent owned by private equity firms Apax Partners, the Blackstone Group , Kohlberg Kravis Roberts (KKR) , Permira Advisers

and Providence Equity.

Shares in France Telecom were little changed by the announcement and were up 1.3 percent at 1020 GMT, outperforming the European Dow Jones Telecommunications index <.SXKP>. Those in rival Swisscom were up 0.5 percent.

(Reporting by Sven Egenter and Catherine Bosley, editing by Anthony Barker)

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