2nd UPDATE: EU Probes Telefonica,Portugal Telecom Non-Compete Deal

The European Union's top antitrust authority has begun investigating an agreement between Spanish telecommunications company Telefonica SA (TEF) and Portuguese peer Portugal Telecom SGPS SA (PT) to ascertain whether they have broken competition rules, it said Monday.

The European Commission probe is centered on whether the two companies breached EU rules by agreeing not to compete with each other in their respective home markets as part of a deal under the terms of which Telefonica last year acquired control of Brazilian mobile telephone company Vivo Participacoes SA (VIV), formerly a joint venture with Portugal Telecom.

According to a deal-related document dated in June, the parties had to "refrain from engaging or investing, directly or indirectly through any affiliate, in any project in the telecommunication business...that can be deemed to be in competition with the other within the Iberian market" until at least Dec. 31, 2011.

The takeover itself isn't under investigation, the commission said. A Telefonica spokesman declined to comment. Representatives for Portugal Telecom weren't immediately available to comment.

The probe will also focus on cooperation before the Vivo deal, the commission said. In 1997, Telefonica and Portugal Telecom had made an agreement to cooperate outside of the EU and the commission now wants to find out whether that deal also included some non-compete element for the EU, mainly Spain and Portugal.

Telefonica and Portugal Telecom said last July they had agreed for PT to sell its stake in Vivo to Telefonica for EUR7.5 billion.

-By Alessandro Torello and Patricia Kowsmann, Dow Jones Newswires; [phone]; [e-mail]

(David Roman in Madrid contributed to this story.)