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UPDATE 1-Airlines resolve dispute over Chicago O'Hare expansion

(Adds city council aviation committee approval of new airline agreements)

March 15 (Reuters) - An $8.5 billion expansion plan for Chicago's O'Hare International Airport got a lift on Thursday after the airport's two major carriers, American and United, settled a dispute that had clouded the project.

United Airlines and American Airlines said in a joint statement they had reached an agreement on the number of gates to be assigned to each carrier, putting to bed a weeks-long feud over which gates would be designated for common use.

"The number of gates assigned to each airline remains the same as the proposal introduced to City Council in February; however, the city committed to working with American to expedite the construction of three common use gates," the statement said.

American Airlines had opposed language in the airport lease that it argued would grant United five out of eight gates all parties had agreed to designate for common use as late as Feb. 8.

As a solution, the city has agreed to speed up construction of three gates for common use. Those gates are now set to come into use at roughly the same time United will get its five additional gates.

American Airlines carriers accounted for 35.5 percent of passengers at OHare in 2016, versus 44.5 percent for carriers of Chicago-based United, according to city data.

"This agreement is a watershed moment for Chicago, and it means we will create tens of thousands of jobs for Chicagoans from every part of the city," Chicago Mayor Rahm Emanuel said in the joint release.

OHare is the world's second-busiest airport in terms of take-offs and landings after Atlanta's HartsfieldJackson International Airport, according to an Airports Council International 2016 ranking.

The eight-year expansion plan calls for replacing one of OHares existing terminals with a new global terminal, where United and American would be relocated. Other terminals would be renovated to expand gate capacity. Construction is scheduled to begin next year.

Late last month, American accused United of orchestrating a "last-minute secret deal" with the city of Chicago to alter the airport's lease, a claim United denied.

Chicago's city council aviation committee on Thursday approved new airline use and lease agreements needed for the project, according to a city spokeswoman. An initial $4 billion of bond financing is expected to be taken up by the council's finance committee on March 26, followed by a final vote on the expansion plan by the full city council on March 28. (Reporting by Alana Wise in New York and Karen Pierog in Chicago Editing by Matthew Lewis and Tom Brown)