Vodaphone had challenged Telekom's rights to limit sales of the phone to customers signing up to a two-year contract with them. It gained a temporary injunction forcing T-Mobile wireless division to sell the cellphone without any calling plan or software lock.

But a court in the German city of Hamburg has now rejected Vodafone's legal claims under German competition law.

Court says Telekom within its rights

Judges said T-Mobile was entitled to limit sales of the iPhone to customers signing up for a two-year T-Mobile contract. Vodafone is expected to appeal.

The phone has also been sold in Britain, France and the United States through just one operator. Programs are available on the Internet allowing iPhones to be used on different networks. Apple has threatened to respond by introducing updated software.

The iPhone is effectively an iPod music player with additional phone and computing features.