By Jessica DiNapoli

NEW YORK (Reuters) - A U.S. bankruptcy court judge granted Avaya Inc approval on Friday to tap $425 million of the $725 million loan proposed to carry the telecommunications company through its restructuring, funds the company said were essential to continue operations.

Avaya filed for Chapter 11 bankruptcy protection on Thursday to cut its debt of about $6 billion after efforts to sell its call center business and reach a consensual deal with creditors failed.

The bankruptcy underscored the challenges telecoms companies face as they transition to software and services from hardware.

"The company has taken a decisive step to rightsize its balance sheet," Pat Nash, one of the company's attorneys, told Judge Stuart Bernstein at the U.S. Bankruptcy Court for the Southern District of New York.

Nash said Avaya would be "marrying a balance sheet restructuring with an operational transformation."

The company's lawyers said a significant portion of the $725 million loan, extended by an affiliate of Citigroup Inc <C.N> for up to a year, was funded by Avaya's existing lenders.

Avaya plans to return to U.S. bankruptcy court on Monday for approval on other expenses.

Buyout firm Clayton, Dubilier & Rice LLC (CD&R) had been in the lead to acquire Avaya's call center business for about $4 billion. But Avaya and CD&R could not agree on price, terms or how the deal would effect Avaya's pension obligations, a person familiar with the matter said on Thursday.

Avaya has liabilities totaling about $1.5 billion stemming from its pension and other promised post-employment benefits.

The Santa Clara, California-based company faced potential penalties from lenders on Jan. 28 after it did not turn in its annual financial statements for its fiscal year on Dec. 29.

Avaya has consistently reported losses, stemming in part from costs related to its debt. It was taken private in 2007 for $8.2 billion by private equity firms Silver Lake Partners LP and TPG Capital LP.

(Reporting by Jessica DiNapoli; Editing by Daniel Wallis)