The Spanish telecoms group's original deal to buy KPN's E-Plus unit was thrown into doubt earlier this month when Mexican billionaire Carlos Slim's America Movil said it would launch a bid for the shares in KPN it does not already own.

America Movil, which owns almost 30 percent of KPN, said on Monday it backed Telefonica's new offer for E-Plus and would press ahead with its plan to buy the rest of the Dutch firm.

The agreement moves Telefonica closer to its goal of stepping up its challenge in Germany to market leaders Deutsche Telekom and Vodafone.

It also offers a better deal for America Movil, Telefonica's arch-rival in Latin America which on paper has racked up huge losses on its European investments since buying minority stakes in KPN and Telekom Austria.

America Movil shares climbed over 1 percent in morning trading in Mexico. The stock remains down more than 20 percent since it announced it would bid for KPN, reflecting investors' caution over the company's European expansion effort.

Slim's phone company has offered 7.2 billion euros for the rest of KPN, a deal that no longer gives the Mexican tycoon access to the key German market.

KPN will receive 5 billion euros in cash for E-Plus and get a bigger stake in Telefonica's German business of 20.5 percent, compared with the 17.6 percent previously offered.

BPI analyst Pedro Oliveira said the deal showed Carlos Slim and Telefonica boss Cesar Alierta could overcome their differences. "Their business sense is becoming stronger than the rivalry between Telefonica and America Movil," he said.

But uncertainties remain.

Telefonica still needs to win support from antitrust regulators for a deal that will reduce the number of players from four to three in a market with 112 million subscribers.

Many European telecoms firms are looking to consolidate to cope with saturated markets, recession-hit consumers, tough regulation and expensive network upgrades.

However, regulators are wary that reduced competition could lead to higher prices for consumers and mobile profit margins in Germany are already much higher than in Britain and France.

"Politicians seem to be more favourable to protecting telecoms companies ... but this is an operation that will have a lot of scrutiny from the regulators," BPI's Oliveira said.

DUTCH CHARM OFFENSIVE

The deal also does not settle the future of KPN, where an independent foundation that has the power to block a takeover of the business has expressed concerns over America Movil's proposed 2.4 euros a share bid for the stock it does not own.

"There will be a tussle for control of KPN - the question is will shareholders allow America Movil to take control of KPN via the tender offer at such a low price?" said Bernstein Research analyst Robin Bienenstock.

America Movil executives will meet the Dutch Minister for Economic Affairs, along with KPN union representatives on Wednesday to discuss its plans for the Dutch telecoms group, sources told Reuters.

"The Minister wants to be informed given the importance of KPN for the Dutch economy," said one of the sources.

KPN's largest union Abvakabo FNV also has questions about the deal.

"What are you investing in the cooperation with KPN and what will that mean for jobs in the Netherlands? That's what I want to get an answer to," said a union spokesman.

America Movil first bought into KPN shares in June 2012 at roughly 8 euros per share and then upped its stake at a much lower price in a February capital increase.

At 1455 GMT, KPN's shares were up 3 percent at 2.332 euros, while Telefonica's were slightly up at 10.805 euros and shares in its German unit were up 2.7 percent at 5.211 euros.

TACTICS

Telefonica, on a debt-cutting drive to improve its balance sheet, can afford the new deal because it has shed 10 billion euros of debt since June 2012 and plans more asset disposals.

"The increased amount is not big enough to put pressure on the rating," said Carlos Winzer, analyst at credit ratings agency Moody's, which rates Telefonica at Baa2, two notches above junk territory.

Under the revised terms, Telefonica will sign an option to buy back 2.9 percent of its German subsidiary after a year at a price of 510 million euros. The Spanish group sees the German deal generating up to 5.5 billion euros in cost savings.

Antitrust experts told Reuters last month that Telefonica was likely to try to win over antitrust regulators by offering to give up some spectrum and by giving greater access to its networks to new so-called "virtual" operators.

As for America Movil, it stepped up efforts to win over KPN and the Dutch firm's foundation to its plan to buy the rest of the business, saying on Monday it would maintain KPN's headquarters in the Netherlands and keep its stock market listing in Amsterdam, as well as its commercial brands.

"By achieving majority ownership, AMX (America Movil) believes it will be able to support KPN to a greater extent with its investment plans in a rapidly changing European environment," it said.

Walter Samuels, a spokesman for the KPN Foundation, declined to comment on Monday's announcements on Germany and the tender offer, other than saying: "We're still following developments."

It remains to be seen how many KPN shareholders - which now include hedge funds who entered to bet on the M&A battle over Germany - will sign up for the tender. Some could pressure America Movil to raise its offer, analysts said.

(Additional reporting by Julien Toyer in Madrid, Elinor Comlay in Mexico City and Leila Abboud in Paris; Writing by Leila Abboud; Editing by Louise Heavens, Mark Potter, Simon Gardner, Andrew Hay)

By Sara Webb and Clare Kane