Last checked at 
* Q2 core profit 4.43 bln euros vs 4.35 bln expected
* Still sees stable 2014 core profit of about 17.6 bln euros
* Commercial momentum in US offsets weak Europe (Updates shares)
By Harro Ten Wolde
FRANKFURT, Aug 7 (Reuters) - Deutsche Telekom rejected an offer from Iliad for its mobile business inthe United States and said regulators there should help smallerplayers compete against bigger rivals if they are not allowed tomerge.
Deutsche Telekom makes about a third of its sales and afifth of core profits in the United States, but believes itssubsidiary T-Mobile US lacks critical mass, frequencies andcapital to compete with leaders AT&T and Verizon.
Its plan to sell T-Mobile US to local rival Sprint foundered on Wednesday, leaving Iliad - a much smallerFrench company with little experience of U.S. telecoms - as theremaining bidder although others could still emerge.
Deutsche Telekom's Chief Executive Tim Hoettges made itclear that Iliad's $15 billion offer was not good enough andthere was no need to rush into a sale, while leaving the dooropen to an eventual U.S. exit.
"We have always said that we would be open to offers forT-Mobile US which would improve its position and that of itsshareholders," he said on a conference call on Thursday. "At themoment, we don't have an offer which fits those criteria."
The Sprint talks collapsed because a deal would have leftthe United States with only three major mobile phone networks, aprospect opposed by regulators in Washington. It was the secondfailed attempt to sell T-Mobile US since late 2011.
Iliad's billionnaire founder Xavier Niel believes he cansecure a deal where Sprint failed because a takeover would notlead to fewer competing U.S. mobile networks.
A person close to Iliad said on Thursday that it would weighwhether to improve its $33 per share bid for 56.6 percent ofT-Mobile US, but that it first wanted to talk to the Germancompany to learn more about its expectations.
Much would depend on whether another bidder emerges, theperson said, and whether Iliad can convince Deutsche Telekom ofits ability to run T-Mobile in a more cost efficient way.
Deutsche Telekom shares fell as much as 5 percent to a16-week low on Wednesday after the Sprint talks collapsed. Theywere trading down 0.6 percent by 1355 GMT on Thursday, in linewith an index of European telecoms companies.
T-Mobile US shares were down 0.8 percent, while Iliad stockin Paris was down 1.8 percent.
NEW SUITORS
After years of losses and a purchase of smaller rivalMetroPCS, T-Mobile has become one of few parts of DeutscheTelekom that is actually growing.
T-Mobile, the fourth-biggest U.S. mobile network operator,last week reported its first quarterly net profit in a year,raised its forecasts for subscriber growth and reported the mostpost-paid phone subscriber additions in the industry.
Other suitors could emerge. The chairman of thesecond-largest U.S. satellite operator, Dish Network Corp, said on Wednesday it now made sense to considerbidding for T-Mobile US, with Sprint out of the picture.
But a buyer will need deep pockets.
Analysts estimate that T-Mobile US will need anywhere from$5 to $10 billion to bid for the best spectrum in an auctionnext year, and further billions to keep upgrading its network tokeep up with consumer demand for quality and speed.
Hoettges is expected to lobby regulators for betterconditions in the auction, including setting aside low-frequencyspectrum for T-Mobile and on Thursday he said his company wouldneed special treatment.
"In the U.S. we have the situation that the two largestoperators take more than 100 percent of the cash flow in themarket," he said. "If consolidation is not desired, regulatorsshould help to improve the position of smaller operators."
But he also talked up T-Mobile US's commercial momentum.
"We have an excellent business in the U.S. which is growingorganically," Hoettges said. "At the moment we received no offer(for T-Mobile US) which gives better growth perspectives than wecurrently have."
A rise in earnings in the United States helped Telekomreported a bigger than expected second-quarter core profit onThursday, offsetting heavy investments in its German networks.
The strong U.S. performance helped Europe's largest telecomscompany by sales avoid larger revenue declines suffered byrivals Telefonica and Orange.
U.S. PRICE WAR?
Deutsche Telekom's quarterly earnings before interest, tax,depreciation and amortisation (EBITDA) excluding special itemsrose to 4.43 billion euros ($5.9 billion), above the averageforecast of 4.35 billion euros in a Reuters poll.
With 50.5 million customers, T-Mobile US is bigger thanDeutsche Telekom's German business which has 39.3 million.Average revenue per user (ARPU) stood at 26 euros a month in thequarter, compared to 14 euros in Germany.
Deutsche Telekom's desire to leave the U.S. stems in partfrom a realisation that it must invest heavily in faster fibrebroadband in its domestic market or continue losing customers tocable. Hoettges also wants the group, which is 31 percent ownedby the German state, to take part in consolidation in Europe.
The global telecoms industry is in the midst of a wave ofdealmaking as companies look to take advantage of low interestrates to build economies of scale.
Investors fear the end of talks with Sprint could mean aprice war could be imminent in an almost saturated U.S. market.Sprint also named a new CEO to pilot a solo strategy. ($1 = 0.7470 euro) (Additional reporting by Leila Abboud; editing by Tom Pfeiffer)
