The Justice Department on Wednesday sued to block AT&T’s proposed $39 billion acquisition of T-Mobile, a deal that would create the largest carrier in the country and reshape the industry.

“The department filed its lawsuit because we believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their mobile wireless services,” said James M. Cole, the deputy attorney general.

The complaint, which was filed in the United States District Court in Washington, said that T-Mobile “places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition.”

The complaint also highlighted T-Mobile’s high speed network and its innovations in technology, noting that it was the first to use Google’s Android operating system and BlackBerry wireless e-mail, among other things.

“AT&T’s elimination of T-Mobile as an independent, low-priced rival would remove a significant competitive force from the market,” the complaint said. “Thus, unless this acquisition is enjoined, customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger.”

Shares of AT&T dropped nearly 4 percent on the news, to less than $29. Shares of Deutsche Telekom, the parent of T-Mobile, fell 5 percent in trading in Frankfurt.

In a statement, AT&T said: “We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the D.O.J. that this action was being contemplated.”

“We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The D.O.J. has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court.”

AT&T already has three high-priced law firms advising on the deal, including Sullivan & Cromwell, Arnold & Porter and Crowell & Moring. T-Mobile is receiving legal advice on the merger from Wachtell, Lipton, Rosen & Katz; Cleary, Gottlieb, Steen & Hamilton; and Wiley Rein.

Ever since AT&T announced plans to buy T-Mobile from Deutsche Telekom for $39 billion in March, the deal has proved controversial. Lawmakers, consumer advocates, and rivals have voiced opposition to the merger, saying it would significantly reduce competition. The deal would have left just three major players: AT&T, Verizon and the significantly smaller Sprint Nextel.

The complaint also noted that AT&T and T-Mobile currently compete head to head in 97 of the 100 biggest wireless markets in the country.

(Source: NY Times)