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* Ofcom to go to Europe to try to force legal separation ofOpenreach
* BT and Ofcom unable to agree on Openreach reporting lines
* Both sides say still open to a voluntary deal
* Shares in BT up 0.2 pct (Adds analyst reaction)
LONDON, Nov 29 (Reuters) - Britain's telecoms regulator willgo to the European Commission to try to force BT tolegally separate Openreach, the division that supplies broadbandto millions of homes and businesses, in a major reform aimed atspurring investment in the country's ageing network.
The regulator, which despite Britain's vote to leave theEuropean Union still needs European Commission support to forcethrough change at Openreach, wants BT Openreach to plough more money into upgrading its copper networks to fibre to catch upsome European rivals and the likes of South Korea and Japan.
Ofcom's decision to up the ante follows the failure to reacha voluntary deal after more than a year of talks.
It said it was "disappointed" that BT had not done enough toseparate Openreach from the rest of the group. It had orderedthe former state monopoly to run the network arm as a legallyseparate company in July.
"Some progress has been made, but this has not been enough,and action is required now to deliver better outcomes for phoneand broadband users," the regulator said on Tuesday.
Shares in BT rose 1.7 percent to 356 pence by 1159 GMT, withanalysts saying that the prospect of a long legal tussle inEurope and uncertainty over how Brexit may affect thiseffectively bought BT time to reach a deal.
Citi said in a note that it was positive that Ofcom hadstopped short of breaking up the company, while Accendo Market'sMike van Dulken said that "BT shares have bounced back topositive territory on hopes that Europe, for all its red tape,will actually complicate the matter and delay the process".
BT's rivals, including Sky, TalkTalk,Vodafone, say Openreach delivers poor service, does notinvest enough in the network, particularly in fibre optics whichcurrently connect only 2 percent of premises, and is run toserve BT's bottom line rather than the interests of Britain'sbroadband needs.
TalkTalk said Openreach had become a household name "for allthe wrong reasons".
"We do not think legal separation goes far enough to deliverthe broadband consumers deserve, (but) it is at least a step inthe right direction," TalkTalk chief executive Dido Harding saidin a statement.
Shares in TalkTalk rose 4.2 percent as analysts said a moretransparent Openreach would show whether it and other smallerproviders had been paying over the odds for access to thenetwork.
BT has taken steps to make Openreach more independent andtransparent, and on Monday it appointed former Ofcom boardmember Mike McTighe as the first chairman of a new independentOpenreach board.
"(The board) will ensure that Openreach treats all customersequally whilst investing in better service, broader coverage andfaster speed broadband," BT said.
It said it believed its proposals were fair and sustainableand met Ofcom's objectives without disproportionate costs.
But it has been reluctant to surrender ultimate control overOpenreach. It said two issues were outstanding: the reportingline of the Openreach CEO and the form of legal incorporation.
Ofcom said BT's proposals did not go far enough intransferring people and assets, and in reducing the level ofinfluence that BT Group could still exert on Openreach.
It said it remained open to BT bridging the gap between itsproposal and what is required to address its "strong competitionconcerns".
"We will continue to work with Ofcom to reach a voluntarysettlement that is good for customers, shareholders, employees,pensioners and investment in the UK's digital future," it said.
BT has said Ofcom's proposals to separate its assets andpeople would have a damaging impact on its pension, which is thelargest private-sector scheme in Britain and which had a deficitof 7 billion pounds ($8.73 billion) when last measured in 2014.
Ofcom said the pension issues could be overcome, with anumber of possible mitigations available.($1 = 0.8015 pounds) (Reporting by Paul Sandle, Editing by Sarah Young and LouiseHeavens)
