Germany's biggest digital frequency auction -- set to generate up to 5 billion euros ($7.4 billion) -- can go ahead next year as planned despite complaints from the European Union and small operators.

The advisory council of Germany's telecommunications watchdog agreed the auction could take place in the first half of 2010, said Ulrich Junghanns, head of the council.

The auction centres on licences for spectrum that will be freed up in the switchover from analogue to digital terrestrial television -- also known as the digital dividend.

It is part of an effort to speed the rollout of broadband communications and increase coverage.

This is a milestone for providing coverage in rural areas, Junghanns said.

Demand for additional spectrum is high across Europe and the frequencies coming up for auction are particularly well suited to expand coverage in rural and remote areas because they can carry mobile broadband over long distances.

The sale, which will also include additional UMTS licences, is estimated to generate up to 5 billion euros in proceeds, a welcome injection of cash for the stretched federal budget but well below the more than 50 billion the government received from an auction in 2000.

At the time operators overestimated how quickly they could recoup investments, triggering a bidding war.

European Commissioner Viviane Reding has written to Germany's federal network agency citing concerns that the digital frequency auction could favour larger players.

The watchdog's advisory council said it was somewhat surprised about the attempt to influence the decision without there being legal ground to do so.

Brussels' concerns echo complaints by smaller operators such as KPN's German unit E-Plus and Telefonica's O2 Germany who have asked the regulator to ensure fair access to important frequencies below one gigahertz for all mobile telecoms providers by limiting bidding rights for large players.

They argue market leaders T-Mobile and Vodafone already have an early market entry advantage.

As an alternative, E-Plus and O2 Germany have proposed the regulator reallocate some of the spectrum already in use.

O2 Germany said last week it may consider legal measures if the auction goes ahead as planned.

Current spectrum is used by mobile operators for voice calls but smaller operators want it to be used for exploding data traffic as well.

Germany, Europe's biggest market, follows Finland, Sweden, France and Switzerland in allocating digital dividend frequencies to mobile broadband.

British regulator Ofcom is expected to hold an auction for the UK's digital dividend spectrum next year as well.

The German auction will help the government work towards its broadband strategy, which calls for download speeds of at least 1Mbps to be available nationwide by 2010 and coverage of 50Mbps to reach 75 percent of German households by 2014.

(Reporting by Nikola Rotscheroth in Duesseldorf, Nicola Lleske and Edward Taylor in Frankfurt; Editing by Andrew Macdonald)

($1=.6795 Euro)