(Rewrites, adds detail.)

By Simon Zekaria and Ian Walker

LONDON--The U.K.'s communications regulator Thursday mulled whether telecommunications incumbent BT Group PLC (BT.A.LN) should be separated from its infrastructure division Openreach on competition grounds, amid a rising fight among operators for Internet subscribers in the country's rapidly-developing sector for media services.

The Office of Communications, or Ofcom, announced the completion of the first phase of its digital communications review, where a major focus has been on whether there is sufficient competition benefits to consumers and businesses.

"BT's network has evolved in recent years, with fiber lines running closer to premises. This may require different models of competition than those that worked best for the traditional copper telecom network," Ofcom said.

It believes U.K. consumers would get better services at lower prices if there is a sufficient number of effective competitors. The review also considers the implications for the U.K. of international trends toward consolidation.

Ofcom is seeking views on the review and evidence on future regulatory approaches by Oct. 8.

Matters under consideration also include whether new rules should be applied to BT, such as controls on its wholesale charges with stronger incentives to improve quality of service, or tougher penalties if BT falls short.

It will also examine converging media services, offered over different platforms, or as a 'bundle' by the same operator. For example, telecom services are increasingly sold to consumers in the form of bundles, sometimes with broadcasting content; which can offer consumer benefits, but may also present risks to competition.

"We welcome this review and are confident it will find the U.K. broadband market to be both vibrant and healthy. There has been huge progress this past ten years with an explosion in competition and broadband usage," said a BT spokesman.

"Much of that progress is down to BT investing billions of pounds in fiber at the height of the recession," added the spokesman, saying that spend depends on BT remaining intact.

Pay-television giant Sky PLC (SKY.LN) squared off with its rival.

"It is welcome news that Ofcom is putting the future of Openreach at the centre of its review. For too long, consumers and businesses have been suffering because the existing structure does not deliver the innovation, competition and quality of service that they need," said a spokesman for Sky.

Sky has called on the Competition and Markets Authority, the antitrust regulator, to launch an inquiry into the matter.

At 0747 GMT, shares in BT fell 0.1% to 469 pence. Sky shares rose 0.7%. to 1,133 pence. Still, analysts at Ovum said Ofcom's document suggests it will conclude a full separation of BT from Openreach would be disproportionate.

The review comes as operators battle for subscribers in an intensified media services fight as they bundle together fixed telephony, mobile, broadband Internet and pay-TV. BT has spent on a range of sports channels to develop its TV service and also moved to acquire mobile operator EE in a multi-billion dollar deal, which has raised the stakes in the industry.

"The one area where consumers are getting a raw deal is pay-TV," said a BT spokesman, in a comment against Sky, which is the largest pay-TV operator in the country by number of subscribers.

Write to Simon Zekaria at simon.zekaria@wsj.com and Ian Walker at ian.walker@wsj.com

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