NEW YORK (Reuters) - Verizon Communications Inc plans to launch a standalone service allowing customers to stream movies and television shows over the Web, in a fresh challenge to Netflix Inc and the traditional cable TV business, according to several people briefed on the plan.

The phone company is talking with prospective programming partners about the service, which would be introduced outside of markets where it currently offers its broadband and TV package, known as FiOS, these people said. That would make it available to some 85 million U.S. households.

The new service could be rolled out in 2012, according to one of the people.

Shares in Netflix fell by as much as 5 percent on Tuesday to the day's low before recovering to end the day down 3 percent at $68.14 on the Nasdaq.

The package of programming would be limited in its scope, said two people with knowledge of the plans. Another person said the focus would be packages of movies similar to Liberty Media's Starz Play and Viacom's Epix or could involve children's programming from a partner such as Walt Disney Co or Viacom.

Epix's current exclusive online-streaming contract with Netflix runs out next September, allowing other services to negotiate with Viacom for Epix' package of movies from Paramount, Lions Gate and MGM studios.

Viacom Chief Executive Phillipe Dauman said at a conference this week his company would be open to negotiating with other broadband only services.

People familiar with the plans declined to be identified as the discussions between Verizon and programming partners are confidential and sensitive.

Verizon has been back and forth with programmers over the last two years exploring the possibility. While a lot of the discussion has been around fees, the programmers have also been concerned about the possibility of hurting their existing - and lucrative - relationships with the cable operators.

Crucially, any new Web TV service would be offered outside of Verizon's FiOS current markets. Verizon currently has 5 million FiOS TV subscribers.

A Verizon spokesman declined to comment.

News of the service will have added controversy in the wake of sister company Verizon Wireless's plans to resell cable TV service for Comcast Corp, Time Warner Cable Inc and Bright House Networks.

Under that deal, announced last week, Verizon Wireless will pay $3.6 billion for valuable spectrum from the cable companies. Verizon Wireless is a joint venture of Verizon and Vodafone Group.

While a limited package of TV shows and movies is unlikely to have an immediate impact on cable sales, the launch of an online video service by a major company like Verizon will only add to the uneasiness in the pay TV business.

Companies that sell cable and satellite subscriptions are concerned that customers will drop their pay-TV subscriptions in favor of cheaper Web alternatives - so called 'cord-cutting' or 'over-the-top'.

Most likely, Verizon would want to price any such service competitively with Netflix, whose subscriber count has swelled to some 23 million.

In the last few years, traditional cable operators have been steadily losing video customers to satellite and phone companies who have replicated the cable model. But the biggest fear is that new Web rivals including Netflix, Amazon.com Inc and Google Inc will disrupt the $100 billion a year cable business.

Microsoft Corp had looked closely at launching a similar disruptive service through its Xbox gaming device but has so far decided to work with the cable industry in offering an enhanced service to paying cable and satellite subscribers.

"If this deal comes true it's not clear to me what Verizon would bring to the table that is materially different to what others like Amazon offer," said Carlos Kirjner, analyst at Bernstein Research. Kirjner said Verizon would struggle to negotiate favorable terms to be competitive with Netflix.

Netflix CEO Reed Hastings, speaking about rivals at a UBS Media and Technology investment conference on Tuesday, said "the competitor we fear most is HBO Go," a streaming service for subscribers of the pay TV channel owned by Time Warner Inc.

"HBO and Netflix both spend between $1 billion and $2 billion a year on content. If you want to compete with HBO and Netflix, you better commit to multiple-year spending between one and two billion," Hastings said.

"At this point, none of these guys have chosen to do that," Hastings said. He was not asked specifically about the planned Verizon service.

One reason Verizon is keen on launching online services is to be able to grow its customer base and thereby lower its programming costs on a per-subscriber basis. The more subscribers a distributor has, the easier it is to negotiate lower fees.

Programmers and distributors have been working closely together for the last year on making cable networks available on the Web to paying subscribers in an initiative called TV Everywhere.

Verizon FiOS customers currently have access to around 30 networks over the Web through FiOS TV Online.