Orange, the UK's largest mobile phone operator, has warned the UK's telecoms watchdog to back-off, according to the Observer.

The firm said heavy-handed regulation from Oftel may force it to scale back investment in the next generation of mobile phones, known as 3G.

Mobile operators are already struggling with the high costs of rolling out the new networks and the billions of dollars spent on the licences granting permission to do so.

The existing market for mobiles in most Western country is largely stagnant, while the appeal of 3G's offerings - which include watching video clips and faster internet access - is unknown.

Orange's wrath came after Oftel's decision to refer the price that mobile phone firms charge their consumers to receive calls from other networks to the Competition Commission.

Digital divide

Orange accuses the regulator of trying to cut prices in one of the few areas where operators are profitable.

"If you take a chunk of money out of our business, that's going to affect us," said Peter Dunn, Orange's director of regulatory strategy.

Mr Dunn warned that reduced profits may force the firm to rethink its strategy for implementing its 3G network.

"You will not see any immediate move, but you could see a slowdown in our roll-out plans," he said.

"Our licence commits us to covering 80% of the population is five years' time, but to reach that you don't need to cover much of the country," he warned, adding that this may lead to a digital divide.

Decision due

Oftel denies that it is adopting a heavy-handed approach and says it is simply seeking appropriate regulation.

"We adopt a light approach wherever possible, but the returns on calls to mobiles are significantly above costs," an Oftel spokesman said.

Orange joined together with its three UK rivals to protest against Oftel's decision.

The commission is due to finish its investigation this month, although a six-month extension can be granted.