UPDATE 1-Detroit settlement with insurers cuts bondholder losses

(Recasts throughout; adds details on bondholder losses, comments from emergency manager, insurer)

WASHINGTON, April 9 (Reuters) - The city of Detroit on Wednesday struck a deal with bond insurers over a key class of debt in its landmark bankruptcy case that significantly reduces bondholder losses and could pave the way for agreements with other creditors.

Court-appointed mediators said the settlement reinstates $287.5 million of the $388 million in claims on unlimited tax general obligation bonds insured by National Public Finance Guarantee Corp, a unit of MBIA Inc, Assured Guaranty Municipal Corp and Ambac Assurance Corp.

That is equivalent to 74 cents on the dollar. Last week, the city had suggested in a revised plan to pay some creditors only 15 cents on the dollar in dealing with its $18 billion in debt and other obligations.

The settlement will be included in an amended bankruptcy plan that the city's appointed Emergency Manager Kevyn Orr will release soon, the mediators said.

U.S. Bankruptcy Judge Steven Rhodes must still approve any restructuring plan, and Orr has been furiously negotiating with creditors to find an agreeable resolution to the largest municipal bankruptcy filing in U.S. history.

Late last month, Detroit reached an agreement with UBS AG and Merrill Lynch Capital Services, a unit of Bank of America Corp, on costly interest-rate swaps.

"With this settlement, and hopefully the settlement that we have in front of the court this Friday, the swap settlement, we will now have a sufficient number of supporters to really push our plan forward, so we're very optimistic," Orr said on CNBC on Wednesday. "I implore all parties, specifically our labor parties, please come in and do deals, please come in and do deals. I do not want to do a cram-down in this case."

Once a city wins agreement from a single class of creditors whose interests are impaired by bankruptcy it can then impose, or "cram down," settlement terms on other classes of creditors, under Chapter 9 of the federal bankruptcy code.

"The settlement is a step toward a consensual plan. Cram-down involves costly and time-consuming litigation, and the cram-down standards for Chapter 9 are somewhat fuzzy," said Juliet Moringiello, a professor at Widener University School of Law in Harrisburg, Pennsylvania.

Under the latest settlement, the remaining 26 percent in claims, or about $100 million, would be assigned to establishing an income stabilization fund for the city's "most vulnerable retirees," according to a statement from the U.S. District Court for the Eastern District of Michigan.

The insurers had sued Detroit, which filed for bankruptcy last July, in November saying the city was illegally diverting voter-approved property taxes to the general fund.

The settlement could also lay to rest one of the biggest disputes in the bankruptcy filing - the treatment of some general obligation bonds.

"Our agreement with the city confirms the special status of the unlimited tax general obligation bonds and ensures that pledged property tax revenues will be used to fund future debt service," said Kevin Brown, spokesperson for National Public Finance Guarantee Corp. "The agreement also provides for additional security for the UTGO bonds in the event that tax revenues decline further in the future."

Shares of all three insurers were up more than 1.6 percent in midday New York trade.

(Reporting by Lisa Lambert in Washington, additional reporting by Edward Krudy and Tom Hals in New York; editing by G Crosse and; James Dalgleish)