By Jeremy Pelofsky

WASHINGTON (Reuters) - The U.S. government and NextWave Telecom Inc. NXLC.PK , a bankrupt mobile telephone carrier, battled before the U.S. Supreme Court on Tuesday over valuable wireless licenses, with analysts giving the edge to NextWave.

The U.S. government argued that it gave NextWave plenty of time to pay for the licenses but when it failed, the Federal Communications Commission exercised its regulatory authority to cancel the licenses.

NextWave, which is fighting for the licenses to launch its own competing wireless network once it emerges from bankruptcy, said bankruptcy law prevents the FCC from canceling licenses solely because of non-payment.

While it is difficult to predict the positions of the nine justices, they appeared to question the Justice Department lawyer representing the FCC, Paul Clement, more vigorously, arguing over the agency's role as a creditor rather than a regulator.

"At each point where the FCC made a decision, it made an economic decision and not a regulatory decision," said Justice David Souter. "The FCC went along with the bankruptcy and filed a claim," noted Justice Sandra Day O'Connor.

NextWave filed for bankruptcy in 1998 after paying the $500 million out of the $4.7 billion it owed for scores of wireless licenses. In 2000, the FCC tried to repossess the licenses and resell them to other mobile telephone carriers like Verizon Wireless VZ.N VOD.L , among others.

That sale, which raised almost $16 billion, was thrown into question when a federal appeals court said the FCC violated bankruptcy law when it took the licenses back solely because NextWave failed to pay on time. The FCC then appealed to the high court.

The courtroom was packed with telecommunications lawyers, FCC staff and financial analysts who waited in line for hours, along with NextWave's financial backers and the company's chief executive Allen Salmasi.

EDGE TO NEXTWAVE, ANALYSTS SAY

"I would probably give the edge to NextWave," said Paul Glenchur, an analyst with Schwab Capital Markets. "It seemed like (the justices) were probably putting a little more pressure on the government lawyer to justify the commission's reading of the bankruptcy statute."

"I thought on balance, while it's always dicey to predict outcomes from oral arguments, the Supreme Court seemed pretty sympathetic to NextWave's arguments that bankruptcy rules should trump FCC policy," said Susan Lynner, a Prudential Securities analyst.

Jonathan Franklin, a lawyer representing one wireless carrier, and Clement told the justices that the FCC had another reason to cancel NextWave's licenses, the company was not using the spectrum which ran contrary to the public interest.

The cancellation was automatic and was "supported by regulatory reasons," Franklin told the justices. The decision to cancel the licenses "also reflects the fact that NextWave was not providing service," Clement said.

But Justice Antonin Scalia said the agency could always find a regulatory reason to snatch back licenses and it appeared that the FCC took back the licenses "solely because payment wasn't made."

NextWave's lawyer, Donald Verrilli, seized on that and said bankruptcy law expressly prohibited such a move.

"The record is clear, the FCC revoked NextWave's licenses because NextWave deferred payment," he said. The company has said it would be willing to pay its remaining debt to the FCC.

But Justice Stephen Breyer raised the question of whether that interpretation of the bankruptcy law would make it impossible for the government to reclaim a license from a company that failed to make timely payments.

"I see no way in which the government can collect a debt" owed for the purchase of a license, he said.

A ruling is not expected until the end of the year at the earliest. But even then, more legal squabbling could occur if NextWave loses since the appeals court said other provisions in the law would support the company retaining the licenses.

If NextWave were to prevail, the company said it would launch its network and would consider entering partnerships with other mobile telephone carriers.

"If the FCC wants us to partner with people to bring the services to the marketplace, we are willing to do that," Salmasi told reporters after the arguments. "We want to build the network and bring it to the marketplace."