India's telecoms regulator proposed a sharply-higher-than expected auction base price for 2G spectrum in what could be a blow to carriers that are set to lose their licences after a court order and are betting on the auction to win back permits.

India's Supreme Court in February ordered the cancellation of all 122 licences held by eight operators following a tainted 2008 award process and asked the government to redistribute the licences and radio airwaves through an open bidding process.

A state auditor has estimated that New Delhi could have lost as much as $34 billion (21 billion pounds) in revenue in the scandal-marred licence and spectrum sale.

The Telecom Regulatory Authority of India (TRAI) on Monday recommended a base price of 36.22 billion rupees ($695 million) for every megahertz (MHz) of nationwide spectrum in the 1800 MHz band, where the majority of the radio airwaves would be made available after the cancellation of the licences.

This would be nearly ten times the $320 million (198 million pounds) carriers had paid in the earlier grant process for 4.4 MHz of spectrum. The recommended price is also 8 percent higher than what winning carriers paid for premium 3G spectrum in a 2010 auction.

The Indian units of Norway's Telenor and Russia's Sistema , as well as India's Idea Cellular and Tata Teleservices, are set to lose some or all of their zonal licences after the court order. The auction would be their last chance to win back the permits.

For spectrum in the 800 and 900 MHz bands, the regulator suggested a base price of 72.44 billion rupees per MHz, a proposal, which if accepted, would hit Sistema's Indian unit, which is looking to bid in the 800 MHz band.

The regulator suggested that the auction should be open to all eligible carriers holding spectrum below a prescribed limit.

India is divided into 22 telecoms zones and the prescribed limit is 8 MHz for GSM carriers and 5 MHz for CDMA carriers in all zones except Delhi and Mumbai.

Older and larger carriers such as Bharti Airtel and Vodafone's Indian unit may bid in the auction to buy more spectrum to feed their overstretched networks, but only in zones where their current holding is below the limit.

All spectrum sold in the auction will be valid for 20 years, the regulator suggested, adding that winning carriers should be allowed to make deferred payments over 10 years.

TRAI suggested auction of blocks in 1.25 MHz and that an affected carrier or a new entrant can buy a maximum of four such blocks to go up to 5 MHz, whereas a carrier already holding spectrum can buy a maximum of two such blocks.

The regulator's recommendations are not binding on the government, which has the final say on the auction rules. There is no clarity yet on the timing of the 2G spectrum auction as the June deadline to revoke the licences approaches.

The government has said it will take at least 400 days from the February 2 court ruling date to complete the auction process.

The regulator also suggested that the government should carry out refarming, or switching of, spectrum bands in the 900 and 1800 MHz bands progressively at an early date.

Such a move could hit companies such as Bharti and Vodafone, most of whose existing bandwidth is in the more efficient 900 MHz band. That bandwidth would be replaced with spectrum in the 1800 MHz band.

($1 = 52.5 Indian rupees)

(Editing by Malini Menon and Tony Munroe)