LightSquared's prospects for getting its wireless network off the ground were dealt another blow this week as U.S. government tests found that the signal of the telecom startup would cause harmful interference to a majority of GPS devices.

Preliminary analysis of testing of the company's planned network conducted last month showed the wireless network would not interfere with cell phones but would cause harmful interference to the majority of other tested general purpose GPS receivers, the U.S. Defense and Transportation departments said in a joint statement late Wednesday.

LightSquared is owned by billionaire hedge fund manager Philip Falcone. The company in June revised its plan to deploy a high-speed wireless network serving roughly 260 million people after interference issues arose with GPS devices that are used by the military and in civilian applications ranging from aviation to agriculture.

Falcone, who could separately face civil fraud charges over alleged manipulative trading in debt securities from 2006 to 2008 and other trading violations, bet much of his Harbinger Capital Partners money on LightSquared.

Falcone's hedge fund empire has shrunk from $26 billion to around $5 billion, and roughly half of that money is tied up in LightSquared LP.

LightSquared's signals would also interfere with a flight safety system designed to warn pilots of approaching terrain, the government statement said of a separate analysis performed by the Federal Aviation Administration.

LightSquared Chief Executive Sanjiv Ahuja said the company would work with the FAA on the terrain avoidance systems, but disagreed with the government's conclusions on general navigation devices.

The testing further confirmed that the interference issues are not caused by LightSquared's spectrum, but by GPS devices looking into spectrum that is licensed to LightSquared, Ahuja said in a statement.

Some 500 million GPS receivers are estimated to be in use for government and commercial purposes in the United States.

The Coalition to Save Our GPS, whose membership spans several industries and includes Deere & Co, Delta Airlines, Garmin Ltd and Trimble Navigation Ltd, said the test results reveal substantial risks to everyday activities.

It is clear that LightSquared simply refuses to accept the overwhelming technical evidence on the interference issue and continues to try to 'define away' devastating test results, said Dale Leibach, a spokesman for the group.

Deployment of LightSquared's network depends on regulatory approval from the Federal Communications Commission. The company has said its new deployment plan addresses many of the interference concerns and has partnered with GPS firms to develop solutions to the remaining problems.

We have taken extraordinary measures - and at extraordinary expense - to solve a problem that is not of our making, Ahuja said, adding that the company will continue working with the federal government to allow LightSquared and GPS to coexist.

LightSquared intends to invest $14 billion over the next eight years to build its network, and aims to sell wholesale wireless services to companies which would then resell the service under their own brand names.

The national network would use satellites and land-based signals. The interference issues have arisen over the land-based portion of the network.

The FCC and National Telecommunications and Information Agency are still awaiting a final analysis and report on the testing, which will be completed over the next several weeks.

(Reporting By Jasmin Melvin, editing by Matthew Lewis and Carol Bishopric)