The Italian government looks set to charge a BT-led consortium $1.7bn after it abruptly withdrew from an auction for mobile phone licences.

European rivals to the BT-backed Blu consortium picked up third-generation mobile phone licences in Italy on the cheap, after the firm's exit left five firms competing for the same number of licences, effectively ending the auction after less than three days of bidding.

How the bidding ended

Omnitel, 4,740bn lire IPSE, 4,730bn lire Wind, 4,700bn lire Andala, 4,700bn lire TIM, 4,680bn lire Blu, 4,490bn lire Top five bids, 23,550bn lire (12.16bn euros)

It is a severe blow to the Italian government which had been expected to raise about $25bn from the auction but might end up settling for less than half that amount.

The Ministry of Communications says that Blu had "repeatedly violated its reserve obligations" and as a result it would be retaining the 4,000 trillion lire deposit it had lodged with the government.

"For Blu, there are signs of collusive behaviour which violate the reserve obligations," said Secretary of State for communications Michele Lauria.

The five licence winners are Telecom Italia Mobile; Vodafone-controlled Omnitel; Wind, a France Telecom joint venture; Telefonica's IPSE 2000;and Hutchison Whampoa's Andala.

No fresh auction

On Monday, the government decided not to order a new auction, despite concerns that the result would jeopardise its plans for cutting the budget deficit next year.

Europe's 3G mobile auction proceeds

Germany, $46.1bn UK, $35.4bn Holland, $2.5bn Italy, $10.2bn

But the chief Italian shareholder in Blu said that if the government validated the auction, it had no case against Blu.

"Either the contest is valid or it is not," said Autostrade director general Vito Gamberale.

"Given that it has been declared valid, there is no reason to make Blu pay penalties," he added.

After Blu withdrew in the 10th round of bidding on Monday, the top five bids had totalled 12.16bn euros ($10.18bn) - little more than the total deposit the government had required the bidders to put down before the bidding started.

Similar auctions in the UK and Germany earlier this year had raised billions of dollars more than expected for the governments concerned.

The licence winners in the UK and Germany had paid an average of 630 euros per inhabitant.

But the successful bidders in Italy will pick up licences for a bargain 211 euros per head of the Italian population.

The new generation of third generation mobile phones will feature high speed internet connections and allow video on demand services.

Blu dispute

Blu is one of four existing mobile phone operators in Italy, and its departure is a major boost to rivals backed by other European telecoms giants.

(BT) is an international group that is going through a managerial and financial crisis

Vito Gamerale, Autostrade

Blu - which had asked for the licence auction to be suspended on Friday afternoon - has been embroiled in a shareholder dispute over the company's ownership structure and the likely cost of the new licences.

Blu's Italian shareholders, which include Mediaset and Autostrade, controlled by the Benetton group, blamed BT for failing to take a leading role in the bidding. They reportedly wanted BT to increase its stake in Blu to 51%.

"The responsibility for the impasse belongs to the group that should have taken a leading role and wasn't able to do so," said Mr Gamberale.

"(BT) is an international group that is going through a managerial and financial crisis," he added.

BT's problem is that it already has a high level of debt, partly as a result of paying for its UK 3G mobile phone licence - although BT said it had been prepared to put another $250m into the auction.

But the news further depressed the company's share price, which has fallen sharply in the last year, as analysts worried that the company would lose out on the next wave of mobile phone expansion in Europe.