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Mobile firm Three has warned that it may begin running out of capacity in urban areas by the end of next year if spectrum auctions do not go ahead.

Networks increasingly face congestion as the demand for data soars.

Auctions to free up space for next generation mobile services are earmarked for mid-2012 although Three said that the timetable was "already slipping".

It said it was vital the firm got its fair share of new spectrum.

It also warned that its rivals may attempt to delay the process.

"There is a huge financial incentive for rival operators to delay the auction. We are worried that the other three will attempt to squeeze us out of the market," said Three chief executive David Dyson at a press briefing in London.

Ofcom is due to re-evaluate the fees operators pay for 2G spectrum once the auction is complete.

"The more that is bid for new spectrum the more operators will pay in fees for existing spectrum. They will only start paying the fees from the end of the auction so there is an incentive to delay it," explained Ovum analyst Matthew Howett.

Spectrum allocation in the UK is hugely complex. Historically O2 and Vodafone own the UK's lower frequency 2G airwaves because they were the only operators in the market when that spectrum was handed out.

Orange and T-Mobile were allocated the relatively higher frequency 1800Mhz band, which does not propagate as well, particularly in hilly areas or indoors.

While other European countries have reallocated their 2G spectrum among newer players that hasn't happened in the UK.

Earlier this year Ofcom agreed to allow O2 and Vodafone to re-use parts of the 2G network for 3G services.

While it eased capacity issues for them, it led Three to complain that the playing field for mobile operators was becoming increasingly uneven.

As a sweetener, Ofcom said that it would impose a cap on the amount of spectrum companies could win at the auction to ensure 3 remained a key player in the market.

"It has made it clear that it wants Three in the market and that it values Three's disruptive influence," said Mr Howett.

Rivals are not happy and have threatened legal action over the caps.

"They argue that it is legal state aid," said Mr Howett.

O2 is awaiting the final details of how the auction will work - expected from Ofcom in November - but did not rule out the possibility of further challenges.

"We are focused on a constructive and ongoing dialogue with Ofcom on its proposals. Even if some further consultation is required, it won't delay the availability of 4G, as the spectrum itself will not be available until 2013. The key is to get the auction right," said an O2 spokesperson.

The 4G auctions will sell off spectrum in the 800MHz and 2.6GHz bandwidths.

The first has been freed up by the switchover to digital TV and is particularly valuable to operators because its low frequency means it can cover larger areas and penetrate buildings.

Three currently has the poorest in-building coverage of all the operators.

The huge demand for data has been putting the squeeze on all networks, particularly Three, and the 2.6GHz band will help ease such issues.

Mr Dyson admitted that capacity in large urban areas such as London would begin to run out by the end of next year but he remains confident it won't affect customers.

"I believe the auction will go ahead next year and therefore congestion will not happen," he said.

"We have been assured by the government and Ofcom that distortions will be rebalanced when the auction happens," he said.

But he added that the timetable for the auction process was already slipping.

"Ofcom originally planed to come back to industry with its plans in September or October but that is now likely to be the end of the year or the beginning of the next," he said.

But Mr Howett remains convinced the delays will not affect the auction.

"It is a hugely ambitious timetable, trying to do in 18 months what took three years for 3G, but most are optimistic it can still be met," he said.

Whether rivals will take the legal action they have threatened remains to be seen but pressure will be put on them to push ahead with the process.

"Jeremy Hunt has said that he doesn't want it to be delayed and they will have him breathing down their necks saying 'don't get in the way'", said Mr Howett.

As part of its push to make data more available, Three is dropping the price of its popular all-you-can-eat data plan to £18 a month.