UPDATE 3-Australia Telstra's broadband plan hits snag

* Regulator opposed to current terms of Telstra reform

* Telstra says will work closely with regulator

* Government says watchdog needs to resolve issues

* Telstra shares drop by as much as 4.9 pct, before paring falls (Adds Telstra reaction, fund manager comment)

By Victoria Thieberger

MELBOURNE, Aug 30 (Reuters) - Australia's competition regulator objected to the terms of the proposed split of dominant phone company Telstra Corp , threatening to delay an historic reform designed to wire up the entire nation to high-speed broadband.

The news knocked Telstra shares down 2.9 percent at A$2.98, after touching a low of A$2.92, down 4.9 percent.

Telstra recently hammered out an agreement to hand over its fixed-line telecoms infrastructure, including cable ducts, to a state-run company for use in the government's $38 billion project to build a high-speed national broadband network.

But the Australian Competition and Consumer Commission (ACCC) said Telstra's separation plan could not go ahead in its current form and called for important changes.

The regulator is worried that Telstra's plans mean it has the "incentive and ability" to favour its retail business over its wholesale customers, which it says could impede competition.

Analysts said the watchdog's concerns would probably only mean a bump in the road to getting the deal done.

"It won't stop the process but delay it slightly," said fund manager Theo Maas, of Arnhem Investment Management.

Telstra, whose shareholders are due to vote on the separation plan on Oct. 18, said it had been in talks with the competition watchdog for some months and was aware of the issues raised.

"Telstra believes these issues can be resolved in a way consistent with our principle of protecting shareholder value, and the company will continue to work closely with the ACCC to address its concerns," a spokesman for Telstra said in a statement.

In a later statement to the stock exchange, Telstra said it may still seek shareholder approval for the split on Oct. 18, although the agreements would still be subject to the ACCC's acceptance.

The ACCC's new chairman, Rod Sims, said the commission had several concerns but noted some of them were "readily correctable" by Telstra.

The Australian government stayed out of the debate, with Communications Minister Stephen Conroy saying issues surrounding the structural separation of Telstra were matters for the watchdog to resolve.

"This is entirely a matter for the ACCC," Conroy said.

The broadband project aims to bring high-speed Internet access to more than 90 percent of Australian households using fibre-optic cable, with the rest covered by wireless or satellite.

Broadband speeds in Australia are below the OECD average at 32.4 megabits per second. About 60 percent of households have a broadband connection, similar to New Zealand and the United States, but well behind South Korea on about 95 percent.

"The path to structural separation was never going to be straight line," said John Guadagnuolo, an investment manager at Aviva Investors. "At the end of the day it's government policy, so there has to be a solution to it."

Arnhem Investment's Maas said the ACCC's concerns focused mainly on the transition period during which Telstra would hand over its fixed-line assets to the new network.

"The concern still lies on the road towards the National Broadband Network," he said.

"With NBN being a 10-year process, Telstra will have reasonable power to disadvantage competitors from access to their old copper network during the roll-out period," he said. (Additional reporting by Mark Bendeich and Narayanan Somasundaram in SYDNEY and Sonali Paul in MELBOURNE; Editing by Ed Davies)