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UPDATE 1-Nigeria to seek out-of-court settlement over state funds

(Adds details, quote, comment from lenders' lawyer)

LAGOS, Aug 8 (Reuters) - Nigeria said on Tuesday it planned to withdraw its case against seven local banks over what it says is $793 million due to the state, and that it was seeking an out-of-court settlement instead.

The banks concerned have said either that they do not owe the government money or have paid what is due.

Commercial banks in Nigeria collect grants, taxes, fees and tariffs on behalf of the government which they send to a single treasury account with the central bank in line with a policy introduced in 2015 aimed at curbing corruption.

Last month a court ordered the banks to transfer a combined $793 million due to the government immediately and accused the lenders of withholding funds collected on behalf of the state.

Lawyer Yemi Akinseye-George, however, told the court on Tuesday the government would seek an out-of-court settlement in the matter. The court is due to rule on the case on Wednesday.

"The government has decided to withdraw the case," he told the court without elaborating.

Several of the lenders have said they have remitted all funds due to government.

Three of the lenders -- United Bank for Africa, Fidelity Bank and Sterling Bank, told Reuters last month that they were not owing government.

Babatunde Ogungbamila, a lawyer for another lender, Keystone Bank, told the court that the government ought not to have gone to court over the matter and asked that a cost of 20 million naira be imposed on government. Other lenders also followed.

State-owned Nigerian National Petroleum Company has said the central bank was supervising the payment of funds to the government totalling $231.8 million from Diamond Bank , Skye Bank and Keystone Bank, remittances due to the oil company from the lenders.

Severe dollar shortages have been a hallmark of Nigeria's recession, now in its second year. The downturn was brought on by lower prices for oil, the government's main source of income, mostly paid for in hard cash.

President Muhammadu Buhari has ordered the merger of state accounts into a single treasury account at the central bank to reduce graft and a practice whereby the government would borrow back its own funds from lenders, paying interest to them.

Most of the funds lenders collect on behalf of the government are in hard currency which on past occasions have sometimes been held back for their own operations. (Writing by Chijeioke Ohuocha; Editing by Jeremy Gaunt)