The €152m (£103m) fine was imposed over the Spanish telco's wholesale broadband pricing, which the Commission ruled is holding prices at 20 per cent higher than other European companies.
Telefónica hit back at the fine describing it as "wholly unjustified and disproportionate" as it had complied with competition guidelines set out by the Spanish Telecommunications Market Commission.
European Union competition commissioner Neelie Kroes said that the fine had been increased dramatically from those handed to Deutsche Telekom and France Telecom in 2003 because they had not acted as a deterrent to other companies.
"Telefónica's conduct harmed Spanish consumers, Spanish businesses and the Spanish economy as a whole, and by extension Europe's economy," said Kroes.
However, Telefónica said that the ruling would have wider effects for the broadband market throughout Europe.
"This decision creates a legal insecurity that will alter the future performance of Telefónica and all the operators, with a direct hit in the development of the sector and damage to European end users," said the firm in a statement.
The €152m fine is the largest awarded against a telecoms company. Microsoft's antitrust fine of €497m is the only higher amount imposed by the EU courts.
Telefónica, which owns mobile phone company O2, said it would appeal the ruling.
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