(Adds Sky Italia's decision to appeal in last paragraph)
MILAN, May 22 (Reuters) - Italy's antitrust regulator will impose a three-year ban on Sky's Italian business from distributing exclusive contents on its online video-streaming service platform, it said on Wednesday.
The move follows a deal between Sky Italia and Italy's biggest commercial broadcaster, Mediaset, which the regulator said would further limit competition in a market where Sky Italia is already a dominant player.
Sky Italia said it would appeal Italian competition watchdog's decision.
Mediaset announced last year it was selling its digital terrestrial pay-TV assets, known as R2, to Sky Italia as part of a broader content agreement between the two broadcasters.
The two companies agreed last month to partially cancel the sale, citing the unlikelihood that the watchdog would approve the deal without setting conditions.
However, the Italian regulator said on Wednesday it gave a conditional green light to the deal, adding that the "partial return" of pay-TV assets to Mediaset was insufficient to level the playing field for web rivals.
Mediaset closed its digital terrestrial pay-TV channels and moved its content to a video streaming service, after it lost 80% of its clients after dropping UEFA Champions League and Serie A's soccer matches from its offer.
Reporting by Elvira Pollina, editing by Louise Heavens and Jane Merriman