By Tara Seals

AT&T Inc. is planning to invest billions in upgrading its wireless network this year. It’s an effort to keep up with the iPhone-related mobile data traffic explosion, which has resulted in dropped calls and painfully slow throughput in some congested markets. It’s a problem likely to be exacerbated by the addition of the iPad and the ability to make VoIP calls over cellular on the iPhone.

AT&T expects its 2010 capital expenditures investment to be in the $18 billion to $19 billion range, a company spokesperson said. This will be about $2 billion more than last year on wireless network and backhaul. New York City and San Francisco, where iPhone penetration has skyrocketed, will be particular targets of the upgrade, according to John Stankey, CEO of AT&T Operations. He said during a conference call Thursday that the carrier will double what AT&T did in 2009 in terms of increasing capacity, with 2,000 additional cell sites and 400,000 more square miles of 3G coverage.

The upgrade couldn’t come soon enough: AT&T has famously been the target of disgruntled iPhone-wielding users that have found their service grating to a halt during busy times. Last month’s huge CES show in Las Vegas became a showcase for the problem, with a flood of anecdotes from users detailing the inability to download e-mail and other data “ground stops” during the show.

Now, with the addition of the Apple iPad, data traffic will increase even further. Perhaps not as much as originally suspected, but AT&T and Apple can little afford to provide less-than-blazing speeds for the new tablet for those that do use it on the go. “Consumers may expect more from their iPad than the network can deliver at this point,” Shira Levine, an analyst with Infonetics, told BusinessWeek. “There’s potential for more consumer dissatisfaction.”

Fortunately, AT&T has three months before the 3G version of the iPad goes on sale. Stankey did not outline timeframes for the upgrade, however.

Also, Apple and AT&T as of this week are allowing iPhone owners to use over-the-top VoIP calling from services like fring and iCall, which is certain to drive even more data traffic over the strained network.