Sprint Nextel Corp posted a fourth-quarter loss as 1.3 million subscribers left its mobile phone service, but the results were not as bad as some had feared and its shares rose 28 percent.

The No. 3 U.S. mobile company, whose share price has plunged 70 percent in the past year as it has struggled with customer defections, said on Thursday it expected subscriber losses to narrow in 2009.

Analysts expect Sprint to benefit from selling Palm Inc's

forthcoming Pre phone, expected to be a strong competitor to Apple Inc's popular iPhone.

Sprint will be the exclusive U.S. operator for the phone at least through the end of 2009, a person familiar with the matter said. Sprint has not announced how long exclusivity will last.

But while analysts said Sprint appears to be improving and has enough cash to pay back its debts, they worry that a recovery will be tough in a recession with consumers reluctant to spend and in a wireless market where growth is slowing.

Unfortunately for Sprint, the water is getting drained from the pool just as they are learning to swim again, said Bernstein analyst Craig Moffett in a research note.

Sprint said its net loss narrowed to $1.6 billion, or 57 cents per share, from $29.3 billion, or $10.31 per share, a year earlier, when it recorded a big writedown.

Before items such as asset impairment charges, its loss per share was 1 cent, smaller than the analysts' average forecast for a loss of 3 cents, according to Reuters Estimates.

REVENUE FELL

Revenue fell 14 percent to $8.4 billion, below Wall Street expectations of $8.5 billion.

While some investors worry about Sprint's debt agreements, analysts said they were reassured it can make repayments.

Chief Executive Dan Hesse said on an analyst conference call that Sprint made progress encouraging high-spending customers to stay, but he was still far from satisfied with the subscriber losses after his first year in the job.

We're one year into it. It does take time, Hesse said in an interview. Sprint forecast improvements to customer losses in 2009 but Hesse noted that seasonal trends would still apply. This quarter tends to be tougher than the fourth quarter.

But the CEO said demand for Sprint's Boost prepaid service, which lost about 8 percent of customers in the quarter, improved since Sprint launched a $50-a-month plan in late January.

He said that six times more customers were now joining Boost than were leaving it and many came from other operators.

Hudson Square analyst Todd Rethemeier said Hesse had done as well as could be expected to turn around Sprint's reputation for poor customer service and network reliability.

He inherited a very tough job, Rethemeier said. The problems at Sprint are not his fault. He's doing a much better job of fixing it than anybody else would have done.

1.1 MLN POSTPAID CUSTOMERS GONE

During the quarter, Sprint lost 1.1 million postpaid customers, who pay monthly bills, in line with the average forecast from four analysts contacted by Reuters. Including wholesale and prepaid customers, it lost 1.3 million.

Its biggest rival, Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc , added 1.4 million customers in the quarter, while AT&T Inc, the No. 2 U.S. mobile service, added 2.1 million.

Stifel Nicolaus analyst Chris King said that while Sprint's revenue was weaker than expected and subscriber numbers were still poor, some investors had feared much worse.

Operationally they still continue to struggle mightily, King said. I don't think you necessarily saw any signs of improvement in the fourth quarter.

Sprint said 2009 capital spending would be similar to 2008's, excluding spending on high-speed wireless WiMax technology. It has put its WiMax assets in a venture with Clearwire .

It forecast positive free cash flow during 2009, but did not give a specific number. While Sprint said it has enough cash to meet debt payments, some investors still worry it may violate debt covenants if it keeps deteriorating.

They have enough cash to meet their debt maturities through the end of 2010, but we continue to be worried about them perhaps tripping a debt covenant in 2010 and about their debt maturities in 2011, King said.

Sprint shares rose 28 percent to $3.47 in NYSE trade. Its 7.625 percent bond due 2011 also rose 2.63 cents to 84.38 cents on the dollar, according to MarketAxess.

(Editing by Lisa Von Ahn and Brian Moss)

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