Profits at the three largest U.S. phone carriers are being squeezed by steep discounts on advanced mobile phones, triggered by AT&T's hefty subsidy for the iPhone.

AT&T, Verizon Communications and Sprint Nextel are expected to show a drop in wireless profit margins when they report third-quarter results in coming weeks, also feeling the pinch from consumers holding off on buying add-on services like data to lower their phone bills in the weak economy.

Wireless carriers have always shouldered part of a phone's cost to persuade customers to sign longer-term contracts, but U.S. market leader AT&T (NYSE: T) lowered the bar when it helped Apple launch the latest iPhone for only $200 on July 11.

This forced Verizon Wireless, AT&T's biggest rival, and Sprint (NYSE: S), the No. 3 U.S. mobile service, to follow suit with higher subsidies on their advanced phones, analysts said. While that helps boost service revenue in the longer term, it hurts near-term profits.

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