Sprint Nextel Corp. ( S - Analyst Report ) canceled its 11-year network-sharing deal announced last July, with the privately held LTE provider LightSquared. The company returned $65 million in prepayments to LightSquared.

Under the terms of the deal, Sprint was supposed to use LightSquared’s network to deploy and operate a Long Term Evolution (LTE) network in the 1.6 GHz spectrum band, after the latter resolved its possible network interference issues. But LightSquared failed to get the necessary regulatory approval for the GPS spectrum interference issues within the specific deadline. While the initial deadline was December 2011, Sprint extended it twice to March 15, 2012.

The termination of the contract will not have any adverse impact on Sprint as it extended its network-sharing deal with Clearwire Corp. ( CLWR - Snapshot Report ) . The company will use the unlimited WiMax network of Clearwire to support its 4G services over the next two years (i.e. 2012 and 2013).

The third-largest U.S. wireless carrier plans to launch its own LTE networks in the 1.9 GHz band in mid-2012 and complete the deployment by year-end 2013. Initially, LTE services will be deployed in six markets including Atlanta, Baltimore, Dallas, Houston, Kansas City and San Antonio. The LTE coverage is expected to extend to more than 250 million customers by 2013.

Nevertheless, the Clearwire deal raises Sprint’s payment commitments that would dilute its free cash flow over the next two years. Sprint, which owns a hefty 54% stake in Clearwire, would pay $926 million over the next two years. In addition, Sprint would also make prepayments of $350 million for LTE capacity, provided Clearwire meets certain build-out targets by June 2013.

Facing neck-to-neck competition from AT&T Inc. ( T - Analyst Report ) , Verizon Communications ( VZ - Analyst Report ) and Clearwire, the loss of Sprint’s contract raises concerns on the viability of LightSquared.

We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1–3 months), the stock retains a Zacks #3 (Hold) Rank.