Sprint said on Friday it would exercise its right to scuttle the $9 billion agreement that would have allowed LightSquared to use a network Sprint is building to sell its own high-speed wireless services.

Sprint had the right to back out of the deal if LightSquared failed to get regulatory approval by a deadline that was twice extended, first by a month from its original December 31 date and then to mid-March.

The U.S. Federal Communications Commission last month proposed to indefinitely suspend the authority it had previously given LightSquared to use its satellite spectrum for a ground-based cellular network.

The agency cited tests showing LightSquared's network would interfere with the Global Positioning System used by airlines, the military and others.

LightSquared urged the FCC to reconsider on Friday, the deadline for comments, and said the agency proposal violated the company's contractual and constitutional rights.

"If the FCC reverses its decision to permit LightSquared to move forward, it will be a bait and switch by the federal government of historic scale," the company said in a statement.

After the FCC's proposal, the company said it would lay off nearly half of its 330 employees. Sanjay Ahuja, a telecommunications industry veteran, also stepped down as chief executive.

The loss of the Sprint partnership is another blow.

"We remain open to considering future spectrum hosting agreements with LightSquared, should they resolve these interference issues, as well as other interested spectrum holders," Sprint said in a statement.

LightSquared said previously it has just several quarters worth of cash left.

"For LightSquared, Sprint's decision will enhance our working capital and provide more flexibility," the company said in a statement on Friday.

FCC URGED TO RECONSIDER

LightSquared has lofty ambitions to create a national network that could serve roughly 260 million people using satellites and land-based signals.

It would expand mobile broadband service at a time when the government is urging investment in mobile infrastructure, and wireless carriers are scrambling for airwaves to improve their networks.

LightSquared, in comments it said it will file to the FCC on Friday, argued that the FCC must exhaust reasonable alternatives before reaching for the most extreme remedy, as the current suspension proposal is a violation of LightSquared's rights.

The company also asserts that the FCC's proposal is not legally supportable, and that government testing of its network was deeply flawed and biased.

"When you have a situation where significant investment was made on longstanding rules, you cannot then have a decision that is completely antithetical to that," Jeff Carlisle, LightSquared's executive vice president for regulatory affairs and public policy, said on a call with reporters.

"On the law, on the technology and on the public policy here, those factors should compel the FCC to reexamine the assumptions it made in the public notice," he added.

When asked if LightSquared may pursue legal action against the FCC, Carlisle said the company is prepared to examine all options.

The company's fate is critical to investors in Falcone's Harbinger Capital Partners, which once controlled $26 billion in assets but is now down to about $4 billion.

A little more than half of Harbinger's money is tied up in LightSquared. The hedge fund is the company's single largest equity investor.

A spokesman for Harbinger said the hedge fund has no separate comment from the one issued by LightSquared.

BATTLE RAGES ON

"Clearly LightSquared is focused on spinning out resources as long as possible, and this gives them more cash," Tim Farrar, a veteran industry analyst and principal at TMF Associates, said about Sprint's return of $65 million.

"But at the same time, by pushing this situation out further, some of the ability to recover assets in the event of a potential bankruptcy also drain away."

Some industry analysts have speculated that bankruptcy might be LightSquared's only option, but Falcone has steadfastly ruled that out, telling clients he is working on a solution but failing to give many details.

The company has hired prominent conservative litigators Theodore Olson and Eugene Scalia - a sign it could be preparing to take the FCC to court.

Olson served as President George W. Bush's solicitor general and was recently named the No. 1 lawyer in the U.S. capital by Washingtonian magazine. Scalia, the son of Supreme Court Justice Antonin Scalia, has several victories under his belt in corporate challenges to government policies.

(Additional reporting by Svea Herbst; Editing by Andre Grenon, Gary Hill and Tim Dobbyn)

• A Permanent Economic Emergency