PARIS/STOCKHOLM (Reuters) -
France Telecom (FTE.PA)
withdrew a $40 billion offer for TeliaSonera (TLSN.ST) on
Monday, sending the Nordic telecom operator's shares sharply
lower but offering relief to investors in the French firm.

This tie-up always faced long odds: the French suitor was
restricted by its financial targets while analysts say Sweden,
a big TeliaSonera shareholder, was wary of selling at too low a
price for political reasons.

TeliaSonera shares dropped 13 percent to 43.30 Swedish
crowns, while France Telecom shares jumped 7.3 percent.

"By pulling out, France Telecom has show that it is not in
the business of getting big at all costs," said Vincent
Griffon, analyst at CM-CIC Securities. "This announcement
should reassure investors."

France Telecom's indicative cash-and-shares bid, unveiled
on June 5, had failed to win over TeliaSonera's board or
Sweden, which said it was too low. The two companies held talks
but TeliaSonera said the terms did not improve significantly
and the offer undervalued it.

France Telecom said the deal-breaker was money.

"Notwithstanding the interest shown in the project, the
dialogue opened with the board of directors of TeliaSonera was
unable to reach agreement on its financial conditions," France
Telecom said in a statement.

It argued a purchase of TeliaSonera was "not essential to
the pursuit of its strategy."

QUESTION MARKS

The pullout leaves question marks over TeliaSonera's
future. Sweden wants to sell its 37.3 percent stake as part of
its biggest-ever privatization push but it has shown that it
will not sell at any price.

TeliaSonera Chairman Tom von Weymarn said in a statement
the firm had "excellent growth prospects" in its own right.

Robert Jakobsen, analyst at Jyske Bank, said the failure of
talks was unsurprising since TeliaSonera's management had been
clear that the original price was too low.

"Also, France Telecom has been saying that they were not
willing to go much further, so it's not a major surprise."

Sweden's initial public offering in 2000 of Telia -- which
later merged with Finland's Sonera -- ended up losing thousands
of Swedish investors money after the shares tumbled during the
bursting of the dot-com bubble.

Sweden, analysts say, needed a price that at least matched
the IPO terms -- a level closer to 65 Swedish crowns rather
than the 54 to 55 area that the French offer represented.

However, France Telecom has a target ratio for debt to core
earnings (EBITDA) of 2.0 and the company had already indicated
a deal could push that ratio to 2.5 this year. France Telecom
had $60.6 billion in debt at end-2007, TeliaSonera $5.9
billion.

While France Telecom said a merger would have created the
world number three in broadband and world number four in
mobile, the market saw limited scope for cost savings.

Debt investors welcomed the news. Five-year credit default
swaps for France Telecom narrowed 10 basis points to 103,
meaning the cost of insuring 10 million euros of the French
firm's debt has fallen 10,000 euros ($15,790) to 103,000.

FOCUS

France Telecom has not revealed the final terms it offered
TeliaSonera, but a source close to the company said it was
consistent with the debt ceiling the firm has published.

Swedish government officials were not immediately available
for comment. Finland, which owns 13 percent of TeliaSonera,
said it agreed with the TeliaSonera board's statement.

The cash portion made up 52 percent of the offer. France
Telecom, according to media reports, had been willing to
increase the cash portion of the bid.

Analysts have said France Telecom may come under pressure
to clarify its acquisition policy and could face calls to
return cash to shareholders.

Poul Jessen, analyst at Dankse Bank, said France Telecom
had faced the choice either to be acquisitive, as Deutsche
Telekom (DTEGn.DE) and Vodafone (VOD.L) have been, or focus on
results.

"They apparently decided to keep focus on the financial
returns," Jessen said.

Jessen said any firm that wants to acquire TeliaSonera will
need to reach a solution to disputes over associate companies
in Russia and Turkey, which could take a long time. "Therefore
I don't expect anyone else to come in," he said.

(Additional reporting by Tim Hepher; Sven Nordenstam and
Adam Cox; Editing by Paul Bolding)

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MOSCOW (Reuters) -
Treasury Secretary Henry Paulson said on
Monday he believes in a strong U.S. dollar and that U.S
officials were working to resolve the country's economic
problems, including regulatory mistakes that led to excesses in
the mortgage and banking sectors.

"I would agree that a strong dollar is a good thing and I
believe it is in our nation's interest," Paulson said in a
taped radio interview with Ekho Moskvy radio station.

"Every economy is going to have some ups and downs and we
are going through a tough period in the United States right
now," Paulson said, adding that U.S. long-term economic
prospects were solid and will be ultimately reflected in the
dollar's value.

Paulson said U.S. policies such as an economic stimulus
program to provide U.S. consumers with tax rebates and moves to
prevent home foreclosures would enhance confidence in the U.S.
economy and efforts to address capital markets turmoil.

"All of these things ultimately will increase confidence in
the U.S. economy and will reinforce our policies for a strong
dollar," said Paulson. He said high prices for oil were a big
burden for the world economy.

"The price of oil right now is creating a big burden on the
world economy," Paulson said.

He said the biggest driver of oil prices was that worldwide
production capacity stayed stagnant and there was very little
that could be done about price in the short term.

"But markets have a great ability to adapt and consumer
behavior will change significantly with prices at this level,"
Paulson said.

Paulson is in Moscow for talks with Russia's top leaders
that some observers say could help shift the focus of a
sometimes frosty U.S.-Russia relationship towards the more
productive areas of trade and investment.

Paulson is due to meet President Dmitry Medvedev and Prime
Minister Vladimir Putin later on Monday.

(Reporting by David Lawder, writing by Gleb Bryanski)

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NEW YORK (Reuters) -
Digital music seller Rhapsody is
launching a $50 million marketing assault on Apple's iTunes,
offering songs online and via partners including Yahoo Inc and
Verizon Wireless, Rhapsody said on Monday.

The songs will be sold in MP3 format, which means users of
the Rhapsody service will be able to play them on iPods.

Before now Rhapsody, jointly owned by Real Networks Inc and
Viacom Inc's MTV Networks, had focused on a subscription
service, allowing unlimited song streaming for $13 to $15 a
month, rather than selling downloads.

But Rhapsody Vice President Neil Smith said the fact the
service has not been compatible with Apple Inc's top-selling
iPod digital player has limited Rhapsody's reach.

"We're no longer competing with the iPod," Smith said.
"We're embracing it."

Rhapsody also will be the music store back-end to MTV's
music Web sites and iLike, one of the most widely used music
applications on social networking site Facebook.

Rhapsody will be available on mobile phones via the Verizon
Wireless VCAST Music service. Buyers of a song over-the-air
directly from phones also will be able to download that song to
their computer. Verizon Wireless is a joint venture of Verizon
Communications Inc and Vodafone Group Plc.

Rhapsody executives describe the strategy as "Music Without
Limits." They said it would be backed by a marketing blitz
worth up to $50 million in media space over the next year in
part by leveraging co-parent MTV's TV networks and Web sites.

CHALLENGERS

Rhapsody is the latest player to challenge iTunes's 70
percent-plus market share of U.S. digital music sales.

Last month digital music service Napster Inc launched an
MP3 store. Both Wal-Mart Stores Inc and Amazon.com Inc launched
stores last year.

None of the new stores has made much of a dent on Apple's
lead. Early this year iTunes became the biggest music retailer
in the United States. It has sold more than 5 billion songs
since it launched in 2003.

Its success has been due partly to a seamless interface
between iTunes and the iPod and because it provides a good user
experience, said analyst David Card of Jupiter Research.

The new digital MP3 stores have been made possible because
the four major record groups last year started to experiment
with allowing retailers to sell music without digital rights
management (DRM) software to prevent illegal sharing of music.

Analysts believe the move by Vivendi's Universal Music
Group, Sony BMG, Warner Music Group and EMI Group will help
open the market for retailers and music companies.

"I think we'll see retailers begin to compete the way they
usually compete with pricing, merchandising and promotions,
rather than due to some arbitrary technology," Card said.

(Editing by David Gregorio and Braden Reddall)

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