UPDATE 1-STC reportedly drops plan to up stake in Spain's Telefonica to 9.9%

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Adds background in paragraphs 3-5

- Saudi telecoms group STC 7010.SE is seeking to keep its current 4.9% stake in Spain's Telefonica TEF.MC and no longer plans to convert the 5% it holds in derivatives into voting shares, El Economista newspaper reported on Monday, citing people familiar with the operation.

Telefonica and STC declined to comment on the report. The Spanish government also had no immediate comment.

In September, Saudi Arabia's largest telecoms operator amassed a 9.9% stake worth 2.1 billion euros ($2.23 billion) in a move to become Telefonica's top shareholder, though it added it did not intend to acquire control or a majority stake.

STC's holding consists of 4.9% of Telefonica's shares and financial instruments that give it another 5% in so-called economic exposure to the company.

As Telefonica is considered a defence service provider, the Spanish defence ministry has a say in acquisitions and holdings between 5% and 10% unless the buyer commits not to request a seat on the board.

($1 = 0.9420 euros)

(Reporting by David Latona, Belen Carreno, Jesus Aguado and Inti Landauro in Madrid and Hadeel Al Sayegh in Riyadh; Editing by Andrei Khalip)

((david.latona@thomsonreuters.com; +34 918 35 68 13;))

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