OTTAWA (Reuters) - The Canadian government could clarify the rules for foreign investment in the telecommunications sector within the next few weeks, and outline plans for an upcoming auction of wireless spectrum, a source familiar with the matter said on Wednesday.

Industry Minister Christian Paradis is likely to lay out the new foreign investment rules either in late February or early March, according to the source, who spoke on condition of anonymity.

The move is expected to offer some eagerly awaited clarity for telecom investors impatient with the government’s foot-dragging over new foreign ownership regulations.

The Conservative government has long promised to loosen restrictions on the C$40 billion ($40 billion) telecom industry as one way of easing the dominance of the three big domestic players, who control the lion’s share of the market and are blamed for keeping prices for wireless services among the highest in the developed world.

Rogers Communications , Telus and BCE control 95 percent of the wireless market in Canada.

Paradis will clarify the investment rules at the same time as he releases plans for an upcoming auction of prized 700 MHz wireless spectrum. The frequency is especially useful for covering long distances - ideal for expanding into rural areas - and makes a strong signal in urban areas as it can penetrate buildings and underground parking lots.

To challenge the dominant players, the auction rules may set aside part of the spectrum for new entrants, or smaller players with less access to cash, in a bid to broaden competition in the telecom market.

But industry players and experts are wary of the government’s intentions after several false starts over the last few years. Paradis said in November the file was extremely complicated and he hoped for a “balanced” approach.

“They keep coming to the fence and then balking,” said Iain Grant, a telecom expert with The SeaBoard Group.

“The industry is shaking its head and spending a lot of time praying. The incumbents are patting themselves on the back and opening champagne. The new entrants are just wondering, what did we get ourselves into?” he said.

Grant suggested the established players are aggressively lobbying the government to keep the status quo.

Ottawa took baby steps toward more competition in the sector with a spectrum auction in 2008, in which it set aside a block exclusively for new entrants.

One industry source said the government had been “pretty dogmatic about not telling you stuff.”

Ottawa now caps foreign ownership in the telecom sector at 20 percent of a carrier’s voting shares and restricts direct and indirect control to 46.7 percent.

Paradis is considered unlikely to completely liberalize the industry but he could set out a timetable or doing so over two or three years.

A previous industry minister put forward three options: increasing the foreign ownership limit to 49 percent, allowing full foreign ownership of companies with less than 10 percent market share, or eliminating all barriers to foreign ownership.

Michael Hennessy, senior vice-president for government and regulatory affairs at Telus, believes Ottawa may allow foreign ownership of companies with less than 10 percent market share.

“I don’t think that the government is yet ready to fully open foreign ownership ... I don’t think they’ll have a fully open auction,” he said.

Ottawa should also set caps in the auction, he added.

Another consideration is the estimated C$5 billion in revenues that the government could bring in from the auction, but that figure could be lower if small players with less cash are given a bigger role in the bidding.

“Clearly, this is a minister that doesn’t want to hurt the big investments that some of the larger carriers are making, and that wants to ensure there’s at least a fourth player in the market and has a very big rural agenda,” he said.