In June, prosecutors launched the court action to cancel the $172 million sale of 51 percent in UMC to MTS, Eastern Europe's biggest mobile operator by subscribers, arousing concern about investors' rights and privatisation in Ukraine.

"The court today decided to stop the action against MTS," the judge, Vasyl Saranyuk, said in court. MTS spokesman Andrei Braginsky hailed the decision as positive sign for foreign investors. "The decision is good news for us. It is also a positive sign for all investors. It shows they can come to Ukraine, invest in the country's economy and feel protected," he told reporters after the hearing. MTS's shares were up by 1.7 percent at $117.30 at 1408 GMT.

The stock had suffered in recent weeks due to uncertainty over the legal dispute and investors' fears that MTS could lose its Ukrainian assets. Ukraine, which neighbours Russia and the European Union (News - Websites) , has a mixed record in attracting foreign investment and privatising major state assets. Some investors have been discouraged by red tape, unclear legislation and corruption. But Russian investors have a higher risk appetite and are more used to dealing with the Soviet-style bureacracy than their Western peers are.

Some major Russian players in the telecoms, energy and food sectors have rushed to take a slice of Ukraine's 48-million strong consumer market. The prosecutors had argued that the sale to MTS of the state stake in UMC by fixed-line telecoms monopoly Ukrtelekom violated Ukrainian laws and hurt the country's economic interests. Analysts have said officials were trying to boost the value of Ukrtelekom ahead of its privatisation, slated for the third quarter of the year. They also said the court case was a sign of a struggle for economic influence between business groups in Ukraine ahead of a presidential election due on October 31, when incumbent President Leonid Kuchma is due to step down. MTS's lawers said the deal, completed in 2003, was done according to all Ukrainian laws.

Braginsky said that during the months of legal difficulties MTS had not stopped investing in UMC, the market leader in Ukraine with about five million clients.

MTS has invested about $100 million so far this year. UMC accounts for more than 50 percent of Ukraine's mobile market, which showed double digit growth in the last three years and has potential for further expansion, analysts said. Its major rival Kyivstar, controlled by Norway's Telenor (Oslo:TEL.OL - News; NasdaqNM:TELN - News), has about four million clients.

© Olena Horodetska, "Reuters"