AT&T Inc (T.N) said on Monday it would buy bankrupt NII Holdings Inc's (NIHDQ.PK) wireless business in Mexico for $1.875 billion in a move to create a larger Mexican wireless player that will have a better chance of competing with No. 1 America Movil (AMXL.MX).

NII Holdings, the parent of Nextel operators in Latin America, filed for bankruptcy protection in the United States in September after struggling with $5.8 billion in debt and fierce competition in Brazil and Mexico. It is still exploring options for its larger Brazilian operations.

AT&T plans to combine Nextel Mexico with Iusacell, which the company acquired in November for $1.7 billion. While Nextel Mexico has about 3 million subscribers, Iusacell, Mexico's third-largest wireless operator, has over 8 million subscribers.

Mexico's telecom market is dominated by billionaire Carlos Slim's America Movil, which has a 70 percent share of the market, followed by Telefonica (TEF.MC), with nearly 20 percent.

"While there are logical roaming savings (AT&T) will see by having a presence in Mexico, we believe the bigger driver is the longer runway it sees for Mexico to follow the U.S. in terms of smartphone penetration and mobile data growth," said Wells Fargo Securities analyst Jennifer Fritzsche.

AT&T's shares closed down 19 cents or 0.6 percent at $33.18.

Some of America Movil's assets are up for sale and AT&T had been tipped as a buyer, but the U.S. telecom company had downplayed any interest.

The Nextel Mexico transaction is subject to a bankruptcy auction and approvals by the U.S. Bankruptcy Court for the Southern District of New York, AT&T said in a statement. AT&T's offer is viewed as the "stalking horse" bid, but any other player that tries to buy the asset would have to cover AT&T's breakup fee, according to a source familiar with the matter.

Rothschild served as NII's financial adviser while Jones Day was its legal adviser on the deal.