Prosecutors in Kiev said Thursday that they are seeking to annul the 2002 deal that gave Mobile TeleSystems a majority stake in Ukraine's No. 1 cellphone operator.

"I think there is a chance to return the 51 percent stake in UMC to the state because, during the privatization, laws had been violated," Prosecutor General Hennady Vasylyev told Reuters.

MTS, Russia's largest cellphone operator, paid $171 million for a 51 percent stake in UMC, now Ukraine's most profitable telecoms company.

Two decrees issued by the Ukrainian cabinet and the state property fund approving the sale of state-owned Ukrtelecom's 51 percent stake in UMC were illegal, Rudenko said, because legislation prohibits the sale of assets worth more than 17,000 euros ($20,500) by a state company that is slated for privatization. The law intends to prevent the piecemeal sale of state companies before they are completely ready to go on sale.

"Although the process of privatizing Ukrtelecom is 90 percent complete, it is not yet complete," Rudenko said. "Therefore the Cabinet at the time and the property fund should not have approved the sale."

MTS bought Ukrtelecom's stake over the course of 2002 and 2003. The other 49 percent, which it bought from Dutch KPN and Deutsche Telekom over the same period, is not being contested.

MTS invested nearly $250 million into UMC last year, the company said Thursday.

The Russian telecoms giant insisted that no rules were broken.

"The deal was made in accordance with legislative norms," MTS spokesman Andrei Braginsky said.

He would not say whether the company would take legal action of its own to defend the disputed stake.

UMC accounted for $400 million of MTS's $2.5 billion turnover last year.

The attack is thought to be timed to coincide with the privatization of fixed-line monopoly Ukrtelecom, Aton investment bank said in a research note Thursday. With the sale of UMC, Ukrtelecom's attractiveness to potential buyers was significantly diminished, Aton said.

Ukrtelecom is ready to cooperate fully with the authorities, a company spokesman told Ukraynski Novyny.

The lawsuit follows on a May audit chamber report that found the property fund had reported inflated earnings from Ukrtelecom's sale of UMC, Ukrainian media reported.

Another analyst said MTS has fallen victim to an internal Ukrainian political dispute of which it is not the target.

In advance of fall elections, any of Ukrainian President Leonid Kuchma's foes "could be saying, 'Look what we can do,'" said Yevgeny Golossnoy, telecoms analyst at Troika Dialog.

"But the situation is far from rosy for MTS, which may lose its largest foreign asset in the event of negative developments."

(The Moscow Times 11.vi.04)