SYDNEY (REUTERS) - Australia's TPG Telecom on Tuesday (Jan 29) said it has halted construction of its mobile telephone network because it relied on Huawei Technologies equipment that has been banned by Australia's government on security grounds.

The nascent network is the first commercial casualty in Australia of the ban announced in August and comes as Western powers restrict market access to Huawei over allegations - which it denies - that China could use its equipment for espionage.

The world's biggest telecoms equipment maker has been under siege since the arrest of its chief financial officer, Meng Wanzhou, in Canada last December. The US Justice Department on Monday accused the company of bank fraud and conspiring to steal trade secrets from T-Mobile US.

Broadband internet provider TPG in a statement said it chose Huawei as a supplier because it offered a simple upgrade path from the fourth-generation (4G) network under construction to 5G.

"In light of the government's announcement in late August 2018 that it would prohibit the use of Huawei equipment in 5G networks, that upgrade path has now been blocked," TPG said. "It does not make commercial sense to invest further shareholder funds."

TPG said it made the decision now because the project had reached a point where it would have had to place new orders. It did not elaborate on the fate of the completed part of the network but said it does not expect any impact on 2019 earnings guidance.

Huawei said TPG's announcement was "extremely disappointing".

"The Australian government's 5G ban on Huawei will lead to reduced competition and higher prices for Australian consumers and business," the Chinese firm said in an emailed statement.

TPG shares hit a six-week peak following its announcement. The cancellation has cost it A$100 million (S$97 million) but is widely seen as eliminating duplication under the A$15 billion merger it has agreed with the Australian arm of Britain's Vodafone Group.

Vodafone uses Huawei's 4G equipment in Australia but will not use Huawei in its planned 5G network. Reduced competition among equipment suppliers will have "a financial impact" on those plans, a spokesman said.

TPG's announcement also buoyed shares elsewhere in the sector, with those of Telstra Corp Ltd rising five per cent to a three-month high as investors expected relief from profit-margin pressure in the price-competitive sector. The broader market was down 0.7 per cent.

"You take one network out and then, obviously, in the end, for customers you've got less choice," said independent telecoms analyst Paul Budde. "This will be a relief for Telstra and others."

MEGA MERGER

TPG agreed its merger with Vodafone in August to challenge larger rivals Telstra and Optus, owned by Singapore Telecommunications.

The tie-up combines Australia's third- and fourth-largest telecoms firms into a larger third player holding TPG's fibre network and Vodafone's mobile system, at a time of upheaval in the sector caused by the introduction of a government-owned broadband network.

Both parties said they remained committed to the deal on Monday, though it is yet to receive approval from the Australian Competition and Consumer Commission (ACCC).

Macquarie analysts said TPG halting network construction would "reframe" the regulator's assessment of the deal, which so far been predicated on the tie-up reducing mobile rivalry.

"The ACCC will need to assess the extent to which this decision by TPG changes its counter-factual analysis with regard to mobile competition," the analysts said in a note to clients.

ACCC Chairman Rod Sims said strategic decisions taken during a merger assessment process would be rigorously tested.

"Regardless of the current situation with any setback TPG may face in mobile roll out, we are also interested in their medium to longer term strategy in the context of a converging market," Sims said in a statement.

HUAWEI LOCKOUT

Huawei is facing pressure globally after the United States and Australia initiated measures to restrict market access for the Chinese firm and compatriot ZTE Corp , citing national security concerns.

Australia's intelligence agencies feared that if mobile operators use Huawei's equipment, the company could develop a means of collecting data at the request of China's government - something the company has repeatedly denied.

Chinese law requires organisations and citizens to support, assist and cooperate with intelligence work.