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UPDATE 2-Russia's Rosneft reaches $1.7 billion settlement with Sistema

* Rosneft, Sistema reach amicable agreement

* Settlement announced after Kremlin meeting

* Sistema to pay Rosneft $1.7 billion (Adds Sistema comment)

MOSCOW, Dec 22 (Reuters) - The Sistema conglomerate will pay 100 billion roubles ($1.7 billion) to resolve a dispute with Russia's largest oil producer Rosneft over Bashneft oil company under a settlement announced by both companies on Friday.

Shares in Sistema, which groups the assets of Russian businessman Vladimir Yevtushenkov and includes the country's largest mobile operator MTS, were up 17.73 percent in Moscow and 18.2 percent in London after Rosneft said both sides have agreed to drop all legal proceedings.

Sistema confirmed that, under the agreement, "all sides will recall all their lawsuits and abandon all claims against each other."

"Sistema will be obliged to pay (Rosneft-controlled) Bashneft 100 billion roubles by 30 March, 2018," it said in a statement, adding that Sistema would make the payment using its own as well as borrowed funds.

The agreement requires approval from the Russian regional court.

The dispute centres on mid-sized oil company Bashneft and pitted powerful Rosneft chief executive Igor Sechin, a close ally of President Vladimir Putin, against Yevtushenkov, a billionaire who some media reports suggest is close to Prime Minister Dmitry Medvedev.

The way the battle was fought - via lawsuits and counter lawsuits - and the high value of the assets involved, rekindled concerns about Russia's investment climate and raised questions about the Kremlin's oversight of business.

To comply with the agreement, Sistema may need to raise around 85 billion roubles through bank loans or asset sales, according to estimates by Alexander Vengranovich, an analyst with Otkritie Capital.

FROZEN ASSETS

Rosneft spokesman Mikhail Leontyev said the agreement allows Sistema assets frozen by the courts as part of the dispute to be released before March 30 or even earlier. That would give Sistema more options for raising the funds it needs.

The courts have frozen a variety of Sistema's assets at the request of the oil giant.

Russia's largest lender Sberbank, along with the state-run Russian Direct Investment Fund (RDIF), will assist with raising funds for Sistema to compensate Rosneft for losses, Rosneft said.

The settlement has been reached with the "active contribution" of RDIF and Sberbank, Sistema said.

Sberbank declined to comment.

The compromise achieved with RDIF's assistance "meets both sides' interests, sends a positive signal to the market and improves the investment climate in Russia", RDIF said in statement.

The Russian government seized Sistema's stake in Bashneft in 2014, saying its privatisation had been illegal. Rosneft later bought a controlling stake in Bashneft and in May filed its first lawsuit, alleging Sistema had removed assets from the company - something Sistema denies.

In a second claim, Rosneft was also seeking the return of dividends paid out by Bashneft between 2009 and 2014, when Sistema was its controlling shareholder.

The legal claims made against Sistema by Russia's top oil producer totalled $4.5 billion, prompting Sistema to retaliate against Rosneft by filing a $5.6 billion lawsuit.

A possible amicable agreement in a row between Rosneft and Sistema was a topic of Putin's informal meeting with businessmen on Thursday.

"Putin has repeatedly said that he would support an amicable settlement between Rosneft and AFK Sistema," Putin's spokesman Dmitry Peskov told a conference call with reporters on Friday. (Reporting by Denis Pinchuk, Anastasia Teterevleva, Olesya Astakhova and Tatiana Voronova; writing by Denis Pinchuk and Vladimir Soldatkin; editing by Adrian Croft)