* Dominant provider wanted big discounts to drive sign-ups

* Ofcom says it targeted customers crucial to altnet rivals

* Regulator not minded to block a £50 Virgin Media challenge

(Adds further details on deal and competitors in paragraphs

4-10)

LONDON, July 28 (Reuters) - British regulator Ofcom proposed

blocking a new commercial offer from BT's wholesale

network arm Openreach to protect broadband competition, marking

its first move to stop such a deal from the dominant provider.

Ofcom said the offer was aimed at customers who were key to

the ability of alternative networks providers, such as CityFibre

and Hyperoptic, to grow their customer bases.

"We propose to intervene to direct Openreach to withdraw its

'Incremental New to Openreach Offer', as we consider the charges

are not fair and reasonable and could harm the development of

network competition," Ofcom said on Tuesday.

BT's Openreach network, which serves internet service

providers (ISPs) such as Sky and Vodafone ( VOD ) as well as BT, was

targeting aggressively discounted pricing at new customers,

while keeping prices for others unchanged - a move Ofcom said

could undermine "sustainable competition".

The deal, which would apply only to customers above an ISP's

normal number of sign-ups, offered providers discounts of up to

£9.50 per customer for up to 30 months.

"Openreach must be able to compete, but they cannot use

their significant market power to drive other networks out of

the market," said Natalie Black, Ofcom's Group Director for

Infrastructure and Connectivity.

Britain's fibre broadband market is still developing, with

around half of households that can access full-fibre broadband

yet to sign up.

Ofcom said it was not minded to block two other deals

proposed by Openreach, saying they were unlikely to prevent

other networks competing.

One takes aim at Virgin Media by offering a one-off £50

discount for new full-fibre customers above the usual number of

sign-ups in areas where the second-largest network operates.

The second caps how much providers pay for new high-speed

connections.