TEF Telefonica SA

MEXICO CITY—The Mexican unit of Spanish phone company Telefó nica SA said Tuesday it intends to challenge a 410.9 million peso ($24.5 million) fine imposed by telecommunications regulators over service failures in a central city.

The Federal Telecommunications Institute, or IFT, said a monitoring process in January of this year showed the company failed to meet minimum quality standards in the central city of Leó n, where a high proportion of attempted calls were dropped or failed to connect. The IFT said commissioners voted 5-2 in favor of the fine, the highest the institute has imposed since its creation in 2013.

Telefó nica said it considered the fine, based on 1% of its revenue for all of Mexico and not just the region, was "disproportionate and unjustified."

The company also questioned the findings, saying that between Jan. 18 and Feb. 17 the company completed 2,688 calls successfully in the area while only 112 failed. The period also coincided with a regional fair that saw four million people visit the city of Leó n.

"Under those conditions of saturation, the functioning of the Telefó nica network was optimal," the company said in a statement.

Telefó nica said that kind of action by authorities, rather than promote better service, is likely to discourage investment in the country. "It also sets a negative precedent for all operators, since this kind of inconsistent measurement subtracts credibility from the authorities."

Officials of the IFT couldn't immediately be reached for comment.

The IFT was set up in 2013 under an overhaul of telecommunications laws. The institute is responsible for regulating the sector, including antitrust issues such as determining dominant players in the market.

Telefó nica is the country's second-largest mobile phone operator by subscribers, with 23.4 million at the end of September, a 14% increase from a year earlier. Telefó nica Mé xico reported an 18% increase in third-quarter revenue to €453 million ($485 million), helped in part by regulatory changes in Mexico such as asymmetric regulations on dominant carrier Amé rica Mó vil.

Telefó nica Mexico invested €164 million in the first nine months of the year, mostly in expanding network coverage and capacity.

Write to Anthony Harrup at anthony.harrup@wsj.com

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(END) Dow Jones Newswires

November 10, 2015 13:15 ET (18:15 GMT)

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