By Elvira Pollina

MILAN (Reuters) -A London-based investment firm representing Telecom Italia (TIM) shareholders owning under 3% of the group is seeking to challenge its plan to sell its landline grid, proposing an alternative revamp, a letter to the board seen by Reuters shows.

The challenge from Merlyn Advisors and a former TIM senior executive comes after U.S. fund KKR tabled a binding offer for TIM's grid that valued it at around 23 billion euros ($24 billion), including debt and some variable components.

The letter, signed by Merlyn Advisors' founder Alessandro Barnaba, an ex-JPMorgan banker, and Stefano Siragusa, a former TIM deputy general manager, is dated Oct. 27 and addressed to TIM's board of directors.

Under the proposed alternative scheme, TIM would retain its entire fixed network business as well cloud and digital services operations, while selling its domestic retail business and its prized Brazilian unit to cut its heavy debts.

The sale of the fixed line network is a key plank of TIM CEO Pietro Labriola's strategy to revamp the debt-laden group. However, it has faced major reservations from TIM's top investor Vivendi.

TIM, KKR and the office of Prime Minister Giorgia Meloni all declined to comment. Vivendi was not immediately available for comment.

TIM's board is due to meet to evaluate KKR's bid on Nov. 3 and again on Nov. 5.

Meloni's conservative government has effectively endorsed KKR's approach, authorising the Treasury to take a 15-20% stake in TIM's grid for up to 2.2 billion euros alongside the U.S. fund.

Aiming to reverse the course taken by Labriola, the rival plan envisages TIM holding onto its grid to become an infrastructure company with no retail business, the letter said.

The proposal calls on TIM's board to remove Labriola as a CEO and replace him with Siragusa, who until last year led TIM's network operations.

If the board takes no action, Barnaba and Siragusa could seek government authorisation to raise their stake to slightly above 5% and then call a shareholder meeting to potentially vote on the replacement of Labriola, the letter said.

At present the stake held by Merlyn Advisors via Luxembourg-based fund Merlyn Partners, either through direct ownership or power of attorneys, stands below the 3% disclosure threshold.

Barnaba and Siragusa believe their strategy could drive a fourfold increase in TIM's share price within 24 months to hit 1 euro, they said.

TIM shares closed flat at 0.2412 euros on Friday.

Under their scheme, dubbed TIMValue, TIM would retain control of the network which would remain listed and be combined with parts of the grid of state-backed rival Open Fiber to create a national infrastructure champion with state lender CDP as major investor, the letter said.

TIM would focus on its wholesale-only network business and value-added digital services, such as cloud services for corporate and public administration customers. By selling TIM's Brazilian unit and its consumer retail operations, TIM could add 1 billion euros to its core profit and 600 million euros in cashflow, the letter said.

Burdened with 26 billion euros in net debt, TIM currently burns cash.

Any deal involving TIM assets is subject to government scrutiny under "golden power" regulation, which allows Rome to block any transaction or set terms for it. ($1 = 0.9467 euros)

(Reporting by Elvira Pollina in Milan; Additional reporting by Giuseppe Fonte in Rome; Editing by Valentina Za and Mark Potter)