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UPDATE 1-Volkswagen will pay $1.21 billion to settle U.S. dealer claims

(Adds details of agreements, VW won't sell 2016, 2017 model U.S. diesels)

By David Shepardson

WASHINGTON, Sept 30 Volkswagen AG confirmed late Friday it will make $1.21 billion in payments to 652 U.S. brand dealers as part of its $16.5 billion diesel emissions settlement to date.

VW's dealers will receive an average of $1.85 million each on average over 18 months under the settlement that was first announced in principle in August.

Separately, the U.S. Justice Department, Federal Trade Commission and lawyers for owners of 475,000 polluting diesel cars were filing legal papers late Friday asking a federal judge to grant final approval to buy-back offers and diesel remediation efforts at an Oct. 18 court hearing.

The court documents say Volkswagen won't sell any U.S. diesel vehicles for the 2016 and 2017 model years. The company, which has been barred from selling all diesel vehicles in the United States since late 2015, said earlier this month it is uncertain whether it will ever sell diesel vehicles in the United States again.

As part of the settlement with VW brand dealers, the company will continue making some incentive payments to dealers, buy back diesel vehicles that dealers can't sell and suspend capital improvements for two years that it wanted dealers to make.

Volkswagen still faces billions of dollars in potential civil and potential criminal U.S. fines for violating emissions laws, as well as a potential costly buy-back of 85,000 vehicles equipped with 3.0 liter diesel engines if it can't convince regulators that they can be fixed.

VW has admitted it installed improper software that deactivated pollution controls on more than 11 million diesel vehicles sold worldwide.

In June, VW agreed buy back 475,0000 U.S. vehicles equipped with 2.0 liter engines at a cost of up to $10.03 billion. It also agreed to spend up to $5.3 billion to address claims by federal regulators and 44 U.S. states. (Reporting by David Shepardson; Editing by Diane Craft and Mary Milliken)

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