By Danilo Masoni and Stefano Rebaudo
MILAN (Reuters) - BlackRock raised its stake in Telecom Italia to make it the struggling firm's second-biggest investor ahead of a vote for control, but did not say if it would side with top shareholder Telefonica or rebels fighting the Spanish firm's strategy.
The world's biggest money manager said on Monday it had a voting stake of 7.8 percent in Italy's biggest telecoms group, which is trying to end years of sluggish growth and cut 28 billion euros ($38 billion) in debt.
Telefonica believes the key to survival is selling Telecom Italia's Brazilian business - valued at over $11 billion - to lighten debts that remain heavy despite the sale of assets in Argentina and the issue of convertible bonds.
Such a sale would also benefit Telefonica by allowing it to retain sway over its own Brazilian mobile phone unit Vivo. It has been told by Brazil's competition watchdog that without the sale it must seek a new partner for Vivo.
But businessman Marco Fossati, an investor with a 5 percent stake in Telecom Italia, says selling TIM Participacoes, known as TIM Brasil, would damage Telecom Italia's business.
He and small shareholder group ASATI have forced a shareholder meeting on Friday to vote to dismiss the company board and appoint a new one. Fossati's Findim Group submitted on Monday its slate of five candidates to take over as directors.
One source with knowledge of discussions between the shareholders said BlackRock had seemed initially to be against plans to remove the board but in the last few days there had been talk they could support it.
"On the surface the BlackRock move could be anything or nothing at all. They have so many funds," the person said, referring to the complexity of the giant financial firm's holdings.
Italian market regulator Consob is trying to ascertain whether BlackRock acted on its own in upping its stake, or in agreement with other parties, including Telefonica, a source close to the matter said.
Consob has also threatened to fine BlackRock for not disclosing the increase of its stake, which came to light in newspaper reports of an SEC filing at the weekend.
BlackRock, which previously held around 5 percent of the phone group, said it had made no agreements over the Telecom Italia shares that required disclosure under Italian rules. It said it had registered shares for the meeting, but did not disclose its voting plans.
The world's biggest money manager said late on Monday it had amended a filing to U.S. watchdog SEC made on December 10 to show its holding in Telecom Italia as of November 29 had been 9.97 percent and not 10.14 percent.
BlackRock said the incorrect filing had been an "inadvertent overstatement", adding it would be informing the market about its latest holdings as of Monday within the next 48 hours, as requested by Consob.
Adding to the uncertainty, the two Telefonica representatives on Telecom Italia's board quit on Friday without providing an explanation. Sources close to the matter said the move was aimed at blunting criticism from Cade, the Brazilian competition watchdog, that Telefonica had too much influence over Telecom Italia.
Fossati's group says the board is still tilted in favor of large shareholders.
Telecom Italia's board is led by CEO Marco Patuano and controlled by Telco, the investment vehicle owned by Telefonica and its Italian partners Generali, Intesa Sanpaolo and Mediobanca, which owns 22.4 percent of the Italian phone firm.
Telefonica recently tightened its grip on Telecom Italia by signing a deal to gradually take over Telco, which is expected to meet on Thursday to prepare its strategy ahead of the event.
Industry sources said they expected shareholders with a combined stake of up to 54 percent to attend the shareholder meeting. A lower turnout would benefit Telco.
Fossati's campaign gained traction last week when proxy advisers ISS and Glass Lewis unexpectedly backed their proposal.
But a third source, who had spoken with investors at BlackRock, said it favored the sale of TIM on the grounds that it would create value for shareholders.
Shares in Telecom Italia ended up 5.1 percent after hitting a three-day high of 0.6985 euros in afternoon trading.
"The block (of key shareholders) seems to be cracking and this gives the stock takeover appeal," said Roberto Lottici, fund manager at Ifigest.
"However it is hard to understand whether this is the right time to buy. I for one don't hold any shares and am waiting, because visibility is very low. It's not at all clear now what is going to happen."
($1 = 0.7283 euros)
(Additional reporting by Stephen Jewkes and Valentina Za; editing by Sophie Walker and Tom Pfeiffer)