NEW YORK ( TheStreet) -- Sprint ( S - Get Report) is walking away from its partnership with LightSquared, adding to a string of 2012 setbacks for once-promising 4G wireless service backed by hedge fund Harbinger Capital Management.

While Sprint said exiting the partnership won't be material to its business, the news is a further headwind to the viability of LightSquared, a $3 billion investment made by Falcone and Harbinger Capital Partners. The move also signals that Sprint may draw closer to its other struggling 4G partner Clearwire ( CLWR) as it tries to better handle smartphones like the iPhone.

In the now dead partnership, LightSquared was to pay $9 billion and give an additional $4.5 billion in credits to Sprint to build out the network. However, the Federal Communications Commission didn't approve LightSquared's strategy of converting airwaves used by satellites into a network to handle mobile phone calls. In February, the FCC said that the network would interfere with the Global Positioning System used by airlines, the military and others.

Sprint, the largest partner to LightSquared, will pay back $65 million in prepayments that LightSquared made to the nation's third leading wireless carrier under a 11 year-wireless service agreement that started in June 2011. Last month, LightSquared cut 45% of its staff to preserve cash, as it searches for a survival strategy.

On Friday, Wells Fargo analyst Jennifer Fritzsche wrote in a note that the partnership break between Sprint and LightSquared will benefit Clearwire, as the carrier bolsters its smartphone services to better compete against Verizon ( VZ) and AT&T ( T).

On news of Sprint's walk from LightSquared, Clearwire shares rose nearly 2% to $2.18, while Sprint's shares fell less than 1% to $2.79. Sprint's shares have risen over 19% year-to-date, surpassing a 12%-plus 2012 lift to Clearwire shares. Nevertheless, in the past 12 months both Sprint and Clearwire are off over 40% on profitability concerns and increased competition.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

In October Sprint announced a $15.5 billion four year deal to carry Apple's ( AAPL) iPhone and keep pace with its larger competitors who already had subscribed millions of customers to the popular smartphone. That deal, a commitment to improving smartphone services through a program called "Network Vision" and a multi-billion dollar 4G build with Clearwire may be Sprint's big 2012 focus, after it walked away from a $7.3 billion acquisition of MetroPCS ( PCS) in February.

In March, Clearwire locked up pre-paid wireless carrier Leap Wireless ( LEAP) in a network sharing contract, adding to LightSquared defections.

Sprint upped its investment in Clearwire to $1.6 billion in December and issued nearly $2 billion in a February debt offering, in a move that the company said could help fund an increasing stake in the budding wireless network.

"We view today's announcement by Sprint and Clearwire to be a positive development for both companies since it indicates that they are working together more closely to try to harmonize their strategies and critical network upgrades," wrote Moody's of the February debt offering, maintaining its "ratings review" on Sprint's B1 rating.

In fourth quarter earnings, Sprint reported its largest quarterly loss in three years as iPhone-driven subscriber growth cut at margins. With the iPhone, Sprint added subscribers, ending a run of three consecutive quarters of customer losses. But the Overland Park, K.S.-based company posted a $1.3 billion loss. Sprint also reported bringing on 720,000 iPhone subscribers in the quarter, short of initial projections of roughly 1 million.

A walkaway from a MetroPCS acquisition and a LightSquared partnership don't mitigate big profitability concerns for both Sprint and Clearwire. Both companies reported large 2011 losses, capping a string of unprofitable years that isn't expected to end anytime soon.

Sprint's revenue is expected grow over 4% to $35.1 billion in 2012 as its annual loss narrows from nearly $3 billion to $934 million, according to consensus estimates of analysts polled by Bloomberg. That loss is expected grow back to near $3 billion in 2013, even as sales continue to grow. Meanwhile, Clearwire is expected to lose roughly $500 million in 2012 and 2013, according to analyst estimates.

For more on Sprint and wireless carrier shares, see why the iPhone is causing telecom hangups.

-- Written by Antoine Gara in New York