UPDATE 1-EU drops controversial phone tax plan

* Large majority votes for duty-free treatment of handsets

* EU Commission planned new duties on phones

* Industry pleased

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By Tarmo Virki, European technology correspondent

TALLINN, July 1 (Reuters) - The European Union decided on Wednesday to halt a controversial plan to introduce new taxes on cellphones, Sweden said.

The plan would have raised phone prices for consumers and further squeezed already shrinking phone sales on the continent.

Sweden, which holds the rotating presidency of the EU, said a large majority of the countries voted for the duty-free treatment of cellphones to continue in the Customs Code Committee's meeting.

In December, the EU Commission sent member states a formal proposal to reclassify many phones as "multi-functional devices," which would have triggered a 14 percent tax on phones with TV receivers and 3.7 percent on navigation-enabled phones.