(Changes sourcing; adds details from documents, byline, city in dateline)
By Deepa Seetharaman
SAN FRANCISCO, July 2 (Reuters) - Amazon.com Inc is fighting U.S. regulators' demands that it pay a penalty over its policies on purchases made by children on smartphone applications, according to documents seen by Reuters.
Amazon, the largest U.S. online retailer, faces a potential lawsuit from the Federal Trade Commission, which wants the company to enter into a settlement similar to the one reached with rival Apple Inc in January.
At issue are in-app purchases, in which apps that are downloaded for free onto a smartphone or tablet then charge users for additional services through registered credit cards. Consumers say that children are susceptible to the practice, leading to large bills.
In a draft complaint, the FTC said there have been thousands of complaints related to millions of dollars in unauthorized in-app charges by children on Amazon devices. The agency said Amazon only changed its in-app charging policies last month.
Amazon, which has built a rapidly growing business around its Kindle mobile devices and last month unveiled its own smartphone, said in a letter to the FTC it has already met or exceeded the requirements of Apple's terms.
"The commission's unwillingness to depart from the precedent it set with Apple despite our very different facts leaves us no choice but to defend our approach in court," Andrew DeVore, an Amazon associate general counsel, said in the July 1 letter.
Purchases of digital goods -- from extra game lives to special in-game tools -- are key to the success of tech companies' app stores, which in turn drive usage and mobile device sales.
In January, Apple agreed to refund customers at least $32.5 million and change its billing practices to ensure it obtains consent from parents before charging for in-app spending.
The FTC is pushing Amazon to refund customers, give up any profits from inappropriate activity and to compensate for the FTC's costs.
Many parents who discover the charges and want a refund face "significant hurdles to doing so," the FTC said in a draft of its complaint, adding that the process remains unclear, confusing and without clear instructions for obtaining a refund.
Amazon said it was "deeply disappointing" that weeks of negotiations failed to sway regulators.
In its letter, Amazon said it refunded customers who complained that their children made purchases they did not want. The letter said Amazon's app store included "prominent notice of in-app purchasing, effective parental controls and real-time notice of every in-app purchase."
The FTC declined to comment, saying it "is focused on ensuring that companies comply with the fundamental principle that consumers should not be made to pay for something they did not authorize."
"Consumers using mobile devices have the same long-established and fundamental consumer protections as they would anywhere else," the FTC said.
The Wall Street Journal first reported the news. The Journal reported that the FTC said Amazon would need to make notices of in-app purchases more prominent, require passwords for all purchases and make refunds simpler and easier.
(Additional reporting by Diane Bartz in Washington, D.C.; Editing by Leslie Adler)