Sprint Nextel Corp posted a surprise quarterly profit excluding items, thanks to cost cuts and strong growth in a new service where customers pay for calls in advance, sending its shares up 16 percent.

However, the No. 3 U.S. mobile service suffered its worst ever loss of valuable monthly bill-paying customers, who sign contracts of up to two years, as they defected to rivals. Business clients also canceled service due to the weak economy.

There are no clear signs that the business has made its turn, said Piper Jaffray analyst Christopher Larsen. There's a mixture of good and bad there.

Sprint's net loss swelled to $594 million, or 21 cents per share from a loss of $505 million, or 18 cents per share in the same quarter a year ago.

Excluding unusual items such as amortization, Sprint's profit per share was 3 cents, compared with the average analyst forecast for a per share loss of 4 cents, according to Reuters Estimates.

Revenue fell 12 percent to $8.21 billion. Analysts on average were expecting revenue of $8.29 billion, according to Reuters Estimates.

Sprint said it ended the quarter with an employee base of 49,000, down 7,000 from the fourth quarter, and told analysts on a conference call that it would cut its workforce by another 1,000 people in the current quarter.

Chief Executive Dan Hesse said on the call that he was pleased by growth in some areas, but that the company was being hurt by the economy and needed to do more to stem defections of monthly bill paying customers, called post-paid subscribers.

Sprint lost a net 1.25 million postpaid customers in the quarter, compared with the average forecast for a loss of 1.1 million customers from eight analysts contacted by Reuters.

The impact of the economy in our disproportionally sizable business base continues to be a challenge to us, Hesse told analysts to explain the deterioration in postpaid losses.

However, the company added 764,000 net new Boost prepaid customers, who pay for calls in advance and do not commit to long-term contracts. Sprint said growth was primarily driven by a new $50 unlimited service plan launched by the Boost unit.

Eight analysts contacted by Reuters had on average been expecting Sprint to add about 185,000 prepaid customers, with estimates ranging from a loss of 150,000 to a gain of 600,000.

Prepaid turned around but your highest value subscriber is your postpaid subscriber and that was the weakest to date, said Commresearch analyst Greg Lundberg.

Hesse expects a similar level of prepaid customer additions in the current quarter, due to the popularity of the new Boost plan. Sprint expects 2009 postpaid and prepaid subscriber losses to improve compared with 2008.

The CEO said postpaid numbers would be helped by Sprint's Pre, a high-profile phone from Palm Inc

, in the current quarter but he did not give a specific launch date.

Sprint shares rose 74 cents or 16 percent to $5.41 in morning trade on New York Stock Exchange.

(Reporting by Sinead Carew; Editing by Derek Caney)