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UPDATE 1-Kurdistan pays $1 bln to Dana Gas, partners to settle $2.2 bln London case

London case@

* KRG to pay $600 mln in cash, $400 mln towards investments

* Litigation has been ongoing since 2013

* Dana partners include OMV, MOL, RWE

* KRG working on improving finances ahead of referendum (Adds details, background)

LONDON, Aug 30 (Reuters) - Iraq's Kurdistan has reached a full and final settlement with Dana Gas and its partners over a $2.24 billion London court case that will see the semi-autonomous region immediately pay the UAE-based firm $1 billion, the two sides said on Wednesday.

Dana Gas, its parent Crescent Petroleum and its partners filed a case against the KRG in the London Court of International Arbitration in October 2013 regarding their contract with the Kurdish government and accusing it of underpaying for gas liquids production.

The KRG has argued that the case came amid its fight against Islamic state and as its budget suffered from a steep drop in revenues due to lower oil prices, which forced it to postpone and restructure payments to some counter-parties.

Under the settlement, Kurdistan will immediately pay $600 million to the Pearl Consortium, in which Dana and Crescent own 70 percent and their partners Austria's OMV, Hungary's MOL and Germany's RWE own 10 percent each.

Kurdistan will also immediately pay another $400 million to go exclusively towards Pearl's further development to increase production its fields.

The balance of $1.24 billion will be reclassified from debt to outstanding costs to be recovered by Pearl from future revenues.

"This settlement... opens a new chapter in the relationship between the parties and will take the development of the important natural gas sector to new heights," said Kurdistan Minister of Natural Resources Ashti Hawrami.

Kurdistan has ramped up oil sales independent from Baghdad in past years and is hoping to steeply raise gas output and exports as it seeks economic and possibly political independence from the central government.

"The settlement of all debts and restoration of full cooperation gives a positive outlook for further investment and full realisation of the enormous resource potential of the areas," Majid Jafar, chief executive of Crescent Petroleum, said in a statement.

Pearl agreed to steeply raise gas production within two years while Kurdistan agreed to add two new blocks to Pearl's two existing fields and improve the deal's terms to levels it offers to international firms under production sharing agreements.

The settlement is significant for both parties with Kurdistan settling the dispute at a time it is working on reshaping public finances and filling budget holes caused by a fall in crude prices. The semi-autonomous region will hold an independence referendum next month.

For Dana, the Kurdish settlement will be eagerly watched by its bond holders which are disputing in courts in London and the UAE a move by Dana to restructure a $700 million sukuk bond on the grounds it is no longer sharia-compliant.

The Pearl consortium says it has invested more than $1.2 billion and produced over 150 million barrels equivalent of gas and petroleum liquids in Kurdistan but non-payments from the region has complicated its finances.

Pearl develops the Khor Mor and Chemchemal gas fields. Under the settlement it agreed to increase production at Khor Mor by 500 million cubic feet a day or 160 percent from the current levels within two years. (Reporting by Dmitry Zhdannikov; Editing by Susan Fenton and Susan Thomas)