UPDATE 1-Avon reaches preliminary bribery probe deal; revenue falls

(Adds details on bribery probe, share movement)

May 1 (Reuters) - Avon Products Inc will pay the U.S. government $135 million to settle a multiyear probe into its efforts to develop new markets overseas, according to a preliminary understanding the beauty products company disclosed on Thursday.

The cost of the settlement, subject to a final agreement and approval, would be in fines, disgorgement and prejudgment interest, roughly split evenly between the U.S. Department of Justice and the U.S. Securities and Exchange Commission.

Avon announced the preliminary terms while reporting lower-than-expected quarterly results. Its shares fell 7.7 percent to $14.10 in premarket trading.

The government's investigation began in 2011, following an internal probe by Avon that started in 2008 into allegations of improper payments in China. Avon's own probe has already cost the company about $300 million.

A settlement would end a distraction for Avon at a time when Chief Executive Officer Sheri McCoy, now two years into her term, is still struggling to fix the business.

Avon reported lower-than-expected revenue for the first quarter, hurt by a drop in sales in key markets such as Russia, the United States and Mexico as well as the departure of more sales representatives.

Brazil, Avon's largest market, was an exception, with sales rising 7 percent, excluding the impact of currency.

Globally, Avon sold 6 percent fewer items during the quarter, and the size of its sales force of "Avon Ladies" representatives fell 4 percent.

The company said its net loss had widened to $168.4 million, or 38 cents per share, from $13.7 million, or 3 cents per share, a year earlier.

Adjusted net income from continuing operations came to 12 cents a share. That was 9 cents below what analysts expected, according to Thomson Reuters I/B/E/S.

Revenue fell 11.1 percent to $2.18 billion, while analysts were expecting $2.21 billion.

(Reporting by Phil Wahba in New York; Editing by Lisa Von Ahn)