Nov. 12 (Bloomberg) -- Telefonica SA, Europe’s second- largest phone company, said third-quarter profit dropped 0.6 percent amid the worst Spanish recession in six decades.

Net income fell to 1.99 billion euros ($2.98 billion) from 2 billion euros a year earlier, Madrid-based Telefonica said today in a regulatory filing. Sales fell 5.7 percent to 14.13 billion euros. Analysts had predicted profit of 2.01 billion euros on sales of 14.23 billion euros, the average estimates compiled by Bloomberg.

Chairman and Chief Executive Officer Cesar Alierta last week agreed to spend 3.6 billion euros to buy companies in Brazil and Germany to increase growth outside of Spain. Last month he boosted the company’s 2010 dividend by 22 percent and pledged a higher payment for 2012.

On Nov. 5, Telefonica announced the agreement to buy Telecom Italia SpA’s German broadband unit Hansenet Telekommunikation GmbH for 900 million euros. The previous day it increased its offer for Brazil’s GVT (Holding) SA by 5.2 percent to about 2.7 billion euros to fend off rival bidder Vivendi SA.

Operating income before depreciation and amortization fell 3.3 percent to 5.71 billion euros, beating the average estimate of 5.69 billion euros, according to the Bloomberg survey. Operating expenses fell 6.5 percent to 8.7 billion euros.

Sales in Spain declined 8.9 percent to 4.9 billion euros and revenue in Latin America decreased 2.3 percent to 5.65 billion euros. Revenue from its European operations outside Spain fell 5.5 percent to 3.48 billion euros.

Germany’s Deutsche Telekom AG is Europe’s biggest phone company.

To contact the reporter on this story: Paul Tobin in Madrid at ptobin@bloomberg.net

Last Updated: November 12, 2009 02:04 EST