* Resumption of expansion work in doubt
* Talks focused on how to finance rest of project
* Spain likely to help Sacyr get backing for loans
PANAMA CITY/MADRID, Feb 20 (Reuters) - A deal to resume work on the multibillion-dollar Panama Canal appeared in doubt on Thursday, just hours after an apparent breakthrough, in the latest twist in a protracted dispute over massive cost overruns.
The Panama Canal Authority said late on Wednesday that the Spanish-led consortium expanding the major world waterway had agreed to restart work first thing on Thursday after a two-week stoppage.
It said they had given themselves three days to iron out remaining issues such as how to continue financing the project.
While workers gathered at the site on Thursday, works were still idle on Thursday afternoon. Local media said Panama's President Ricardo Martinelli pointed at the consortium, whose main partners are Spanish builder Sacyr and Italy's Salini Impregilo.
"It seems there is some internal difference between the different contractors," local media cited Martinelli as saying.
Officials have in the past cited a power struggle between the two main members of the consortium, saying Salini Impregilo wanted to take over the lead role from its Spanish partner.
The delay in the project, which centers on a dispute over $1.6 billion in cost overruns that the consortium wants the Panama Canal to pay for, could cost Panama millions of dollars in lost shipping tolls.
Delays are also a setback for companies worldwide that want to move larger ships through the waterway that links the U.S. Gulf Coast to Asian markets.
Earlier on Thursday, the consortium issued a statement saying the parties were engaged "in intense discussions and made progress Wednesday on key issues that would allow funding, resumption of works and payments of subcontractors and workers".
Sacyr was unavailable for comment on why work had not resumed. However a source with knowledge of the matter said he understood there would be a "ramp-up" period and that engineers needed to evaluate the site.
A key part of negotiations is the role that insurer Zurich plays and whether it will convert a $400 million surety bond, taken out by the consortium in case the project wasn't completed, into backing for a loan to help raise the $1.6 billion funding needed to finish the project, sources with knowledge of the matter said.
Zurich does not want to put money into the project but has asked banks to do so, another source familiar with the matter said. The banks are asking for counter-guarantees, the source said. The parties of the consortium are each liable for their own obligations, not jointly, the source said.
Shares in Sacyr rose 4.3 percent on Thursday after news of the agreement to restart work. The project represents a quarter of the company's international revenue.
Salini Impregilo shares gained around 3.2 percent.
Zurich said it was in talks with both parties and was comfortable with its level of exposure to the project, which it said was limited due to reinsurance mechanisms and was well within its risk tolerance.
"As the discussions are still ongoing, we are not in the position to provide any further details," it said in a statement.
SPAIN STEPS IN
The Spanish government is likely to agree to change the status of a $200 million state-backed guarantee it gave heavily-indebted Sacyr in 2009 when Panama awarded it the contract, turning it into backing for finance to finish the project, sources told Reuters on Wednesday.
The guarantee was originally drawn up by Spanish state-backed insurer Cesce as a counter-guarantee to the Zurich bond. The government insurance bonds must be changed if Zurich changes its insurance into backing for a loan.
Cesce and Spain's Economy Ministry declined to comment. Italian state-backed export credit agency Sace, also a part of the guarantee scheme with Zurich, was not immediately reachable for comment.
There has been disagreement within the Spanish government over whether to interfere with the private project, one source with knowledge of the matter said, but it is likely to tweak the conditions of the guarantee because the Sacyr-led contract is such a high-profile one for Spanish business.
Spanish builders are working on big engineering projects around the world, from a train linking the Islamic holy cities of Mecca and Medina, to a metro in Riyadh, Saudi Arabia. Overseas construction has been one of the few bright spots for companies as the domestic economy splutters.
Under Wednesday's deal, the Canal had agreed to pay the consortium $36.8 million to cover work done in December once works resumed.
The project to expand the nearly 50-mile (80-km) transoceanic cargo route was originally expected to cost about $5.25 billion, but that could increase to nearly $7 billion.
Officials and diplomats expressed concern in 2009 when the contract was awarded to the consortium over its ability to complete the work, since its winning bid for the work was $1 billion lower than that of the nearest competitor
The Wood Mackenzie consultancy said on Thursday it expected the cost overrun dispute to be resolved with limited disruption, but cautioned that longer delays would affect U.S. liquefied natural gas producers and created a tighter LNG shipping market.
"If the delays last 6-12 months, it will have limited impact, as trade will carry on much as it does now," Andrew Buckland, senior LNG shipping analyst at Wood Mackenzie, said in a research note.
"But further delays threaten the investments of a significant number of groups that are set to benefit from expanded capacity on the waterway."