* Telecom Italia and Enel division race to wire up nation
* Battle driving up costs, infrastructure duplicated
* Echoes Australian overspend where operators took big losses
* Italy has among the slowest internet speeds in Europe
* Graphic-Global broadband speeds: tmsnrt.rs/2oqZDQV
By Stephen Jewkes and Agnieszka Flak
PERUGIA, Italy, June 28 (Reuters) - In Perugia, crews from Telecom Italia (TIM) and Enel's rival broadband divisions have been working side by side, digging cable trenches along the same roads, sometimes inches apart.
At times, hundreds of workers vied for space across the medieval Umbrian city, the first battleground between the corporate heavyweights as they race to roll out superfast broadband networks across Italy.
The contest to install fiber-optic cables across a country with among the lowest internet speeds in Europe is still in its early stages, but it is already shaping up to be one of the fiercest European telecom battles for years.
This is likely to benefit domestic and business customers by keeping down prices, but it is testing the financial commitment and muscle of both companies, which are being forced to expand their original rollout ambitions, driving up costs.
Since being launched last year, Open Fiber (OF), the broadband unit owned by Enel and state lender CDP, has more than doubled its planned investments to 6.5 billion euros ($7.4 billion), added more cities to its rollout and also included rural areas under a state-subsidised scheme.
Phone group TIM said in March it would reach 95 percent of Italy's population with ultrafast broadband by mid 2018 - almost two years ahead of its original schedule.
The concern, according to industry experts, is that the race to get there first, in Perugia and beyond, could lead to a mutually damaging war where both firms lose money and infrastructure is duplicated across the country.
"It's house by house combat and we're all rushing to plant the flag first," said a person involved in one of the rollouts, speaking on condition of anonymity because of the sensitivity of the matter. "It makes absolutely no sense: we are digging and opening up buildings twice and all we needed was some sort of collaboration."
The battle mirrors one of the most infamous overspends in telecoms history. During the 1990s internet boom in Australia, dominant carrier Telstra and new rival Optus rolled out separate networks, often wiring up the same homes.
By duplicating the Optus network, Telstra's defensive move effectively killed the economics of its rival's plan but it was a Pyrrhic victory: Telstra and Optus both took heavy losses, writing a total of more than $2 billion off their investments.
The duplication of infrastructure in Perugia might serve commercial and competitive purposes, though not a practical one given fiber-optic cable, unlike copper wire, has practically unlimited capacity.
"We're happy because we now have a choice but I realise having two parallel networks doesn't make much sense," said city manager Francesco Calabrese, part of a team that traipsed around Italy for a year to campaign for companies to digitalise Perugia.
It was that effort that made Perugia OF's first port of call.
The Rome government has long been pushing for an all-fiber optic network to be rolled out to boost productivity across a country with the lowest take-up of fixed broadband in Europe.
For years it had accused TIM of acting too slowly to upgrade its ageing copper network to fiber and publicly backed state-controlled Enel to do the job instead.
TIM's reluctance was premised on the belief that the demand was not there to justify over-ambitious investments. It has focused more on cabling fiber to street cabinets - junction boxes - rather than homes, which is less costly and faster, and using alternative technologies over the last mile of copper.
The struggle goes beyond corporate Italy as TIM's biggest shareholder is French media conglomerate Vivendi, which has made no secret of its desire to use the Italian firm to help it create a southern European media empire.
TIM has much at stake: it owns almost all of Italy's wholesale market - selling access to retail telecom operators, who sell it on to consumers - and has ruled the roost for years.
This business brings in about 2 billion euros a year - a significant chunk of its overall Italian revenues of 15 billion, and one which the heavily-indebted group can ill afford to lose.
Morgan Stanley estimates TIM could lose a third of the 2 billion euros by 2022 as a result of the competition from OF.
Retail operators such as Vodafone, Wind Tre and Tiscali are already warming up to the new infrastructure entrant.
"Like all other telecom operators, we want to wean ourselves off TIM, gain full control of our customers and boost our profitability," said Riccardo Ruggiero, CEO of Tiscali.
In Perugia, the population is already benefiting from jumping from the web slow lane to the expressway.
IT specialist Luca Braconi is now able to stream Netflix movies without any hiccups after Enel cabled up his home with a new super-fast link.
TIM will soon be laying its own 1 gigabyte cable under the cobbled streets of Perugia's centre, but Braconi says his loyalties are with Enel for now.
"Enel got there first and I like what I've got. I'm not going to change for the sake of saving a few euros," he said.
With the stakes rising and no obvious winner, the gloves are off. TIM is running more fiber past street cabinets into homes. OF is wooing banks to address concerns about its ability to stay the course.
Both are competing to secure critical permits first.
The row ratcheted higher last week when the government said TIM had gone back on its word not to invest in rural areas, undermining Rome's efforts to tender them out using state subsidies and threatening the economics of OF's project there.
Industry and political sources said the two companies might ultimately have to join forces if losses become too painful, suggesting TIM could potentially spin off its network and merge it with OF or else buy out its smaller rival.
Rome is already using its sway to get the two companies to reach a compromise, one industry ministry source said.
"They need to agree to build just one network or otherwise it'll turn into a battlefield and the only thing battlefields throw up are dead," a person involved in the roll-out said.
($1 = 0.8797 euros)
Editing by Pravin Char