* Majority of 50.3 percent reject plan to oust board
* Rebel investor will continue fight, hints at legal action
* Italian government says it will not take sides in dispute
* Prosecutors investigate deal giving Telefonica more control
By Danilo Masoni and Stefano Rebaudo
ROZZANO, Italy, Dec 20 (Reuters) - Telecom Italia's shareholders on Friday rejected by a slim majority an attempt by dissident investors to oust its board, a decision that allows CEO Marco Patuano to pursue his strategy to revive the debt-laden phone company.
Rebel investor Marco Fossati, who holds a 5 percent stake through his holding company Findim, vowed to continue his fight aimed at weakening the increasingly powerful influence within Telecom Italia of rival Spanish group Telefonica.
"It was a strong signal from the market and it must listened to. We went very close (to winning) and we will go on," Fossati told reporters after the vote, adding that he will submit a proposal to give minority investors greater representation on the company's board.
The tenure of the current board expires in April.
After meeting for more than seven hours, a majority of 50.3 percent rejected the proposal put forward by Fossati, who has raised concerns the company will rush into selling its Brazilian mobile unit TIM Participacoes, a rival to Telefonica's Vivo.
Patuano, who last month unveiled a 4 billion euro ($5.47 billion) plan to fix Telecom Italia's balance sheet and fund much-needed investments to reverse years of share underperformance, denied allegations that the board was being directed by Telefonica.
"In truth, Findim only stated, without giving proof, that Telefonica was trying to direct Telecom Italia's board from the outside, basing his argument on an unproven theory," Patuano, a 49-year-old executive who once ran Telecom Italia's Latin American operations, told the meeting.
"No one can say they are satisfied with the current share price of Telecom Italia. Not investors, nor shareholders, nor its management. Debate is always worthwhile, but manipulation is not," he said.
Meanwhile, Italian Prime Minister Enrico Letta pledged to protect investment in Italy's telecoms network but said the government took no side in a dispute over the role of Telefonica in Telecom Italia.
The dissidents have also criticised Telecom Italia's recent sale of its 22.7 percent key stake in Telecom Argentina for $960 million, as well as a 1.3 billion euro convertible bond issue - a dilutive deal from which they say they were excluded.
Fossati had hinted earlier that, in the event of losing the vote, he may consider pursuing a legal challenge, saying that it would "be necessary to promote the company's interest in different ways than via the shareholder vote".
Friday's vote pitted Fossati, Telecom Italia's third-biggest shareholder, against Telco, the investment vehicle owned by Telefonica, and a group of Italian financial institutions that hold a 22.4 percent stake and managed to appoint the majority of the current board.
Fossati initially appeared to have little chance of success but backing from two groups who advise institutional investors on which way to vote at such meetings, MSCI's ISS and Glass Lewis, had made the outcome more uncertain.
Telefonica has 66 percent of Telco and recently secured an option to gradually take over the stakes of its partners Assicurazioni Generali, Intesa Sanpaolo and Mediobanca from 2014.
Following that deal, Brazil's antitrust watchdog told Telefonica to either sell its indirect interest in TIM Participacoes, which has a market value of nearly $12 billion and is 67 percent owned by Telecom Italia, or seek a new partner for its own $20 billion local business, Vivo.
Telefonica's goal, according to sources familiar with its plans, is to break up TIM Participacoes and divide its assets and network among Vivo and the other two mobile operators in Brazil, America Movil and Oi.
"Telecom Italia needs Brazil," one small retail investor said at the meeting.
Several sources familiar with the matter said on Wednesday that Telefonica would get 18 months to reach a solution.
Meanwhile Italian prosecutors said on Friday that they were investigating the shareholding structure of Telco.
Telefonica declined to comment and other shareholders within Telco could not immediately be reached.