UPDATE 1-Woodside signs memorandum for 25 pct of Leviathan for $850 mln

(Adds analyst comment on LNG contract negotiations)

SYDNEY, Feb 7 (Reuters) - Woodside Petroleum Ltd WPL.AX said on Friday it has signed a memorandum of understanding to acquire a 25 percent interest in Israel's Leviathan field for an initial $850 million, with a plan to complete a full agreement by the end of March.

The proposed deal is smaller than the previous in-principle agreement for Woodside to buy a 30 percent stake in the newly discovered gas prospect for $1.25 billion.

The memorandum of understanding is part of Woodside's strategy to diversify outside of Australia. It is also considering projects in Myanmar and Ireland.

In October, Israel's top court upheld a government decision to allow about 40 percent of natural gas from the country's offshore reserves to be exported, dismissing arguments that more gas should be earmarked for domestic use. News Search ID:nL5N0IB3GZ

(Reporting by Jane Wardell; Editing by Jonathan Oatis)

((jane.wardell@thomsonreuters.com)(+61 2 9373 1817)(Reuters Messaging: jane.wardell.thomsonreuters.com@reuters.net))

Keywords: WOODSIDE LEVIATHAN/

* Woodside to pay up to 11 pct more for smaller stake

* Partners aim to finalise long-delayed deal by end March

* Partners favour gas pipelines over LNG

* Woodside shares slip

(Recasts, adds analyst comments)

SYDNEY/NEW YORK, Feb 7 (Reuters) - Australia's Woodside Petroleum Ltd WPL.AX has signed a preliminary agreement to buy a quarter of Israel's Leviathan field for up to $2.55 billion, paying more for a smaller stake than first planned as gas and oil prospects have increased.

U.S.-based Noble Energy Corp NBL.N is developing the field, estimated to hold about 19 trillion cubic feet of natural gas, with Delek Group DLEKG.TA , Avner Oil Exploration

AVNRp.TA and Ratio Oil Exploration RATIp.TA , each selling one-fourth of their stakes to Woodside.

The partners wanted Woodside's expertise in developing liquefied natural gas (LNG) projects, as well an additional investor, and had agreed in December 2012 to sell a 30 percent stake to Woodside for up to $2.3 billion.

At the time, the field was estimated to have 16 trillion cubic feet of gas.

However negotiations dragged on for more than a year as Israel's supreme court debated whether to allow natural gas exports, other studies on the field's total potential were completed, and options on developing the gas were debated.

The Israeli high court ultimately allowed exports of up to 40 percent of produced natural gas, dismissing arguments that more gas should be earmarked for domestic use.

The proposed new deal, which Woodside aims to finalise in March, would give Woodside a 25 percent stake for up to $2.55 billion plus a royalty on commercial oil production. That includes an up-front payment of $850 million.

Noble Energy will remain the lead partner, with a 30 percent stake.

Woodside sees the Leviathan project in the Mediterranean Sea as an important part of its strategy to diversify outside of Australia. It is also considering projects in Myanmar and Ireland.

The price tag for the revised Leviathan deal was less than the $3 billion that media reports had speculated.

However, with the partners in the project now leaning towards exporting gas from the field by pipeline to Turkey and the Palestinian Authority, Woodside's expertise in building LNG plants may not be needed.

"From a Woodside perspective it's clearly not good news. You're paying more to get less. And strategically this is no longer such a strong fit because it's less LNG, which is what Woodside wanted," said Macquarie Equities analyst Adrian Wood.

Woodside shares slipped 0.2 percent to A$37.56, underperforming a 0.6 percent gain in the broader market.

Other options for the project include building a floating LNG plant, an LNG plant in Israel or one in Cyprus, or pipelines to Greece, Jordan or Egypt, with the Israeli government preferring the pipeline options.

"The Israeli government is looking to use its new found resource wealth to exercise foreign policy," Macquarie's Wood.

"That's a potential risk for the joint venturers that maybe this becomes a political weaopon rather than a return-generating development."

(Reporting by Ernest Scheyder, Jane Wardell and Sonali Paul; Editing by Jonathan Oatis and Richard Pullin)

((jane.wardell@thomsonreuters.com)(+61 2 9373 1817)(Reuters Messaging: jane.wardell.thomsonreuters.com@reuters.net))

Keywords: WOODSIDE LEVIATHAN/