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UPDATE 3-Brazil's Vale agrees to $7 bln Brumadinho disaster settlement

(Adds information on Vale payments, updates share reaction)

RIO DE JANEIRO/SAO PAULO, Feb 4 (Reuters) - Brazilian miner Vale SA said on Thursday it has reached a 37.7 billion real ($7 billion) agreement with prosecutors and the state of Minas Gerais to settle claims stemming from the collapse of a mining dam in 2019 which killed 270 people.

In a securities filing, Vale said it would book a further 19.8 billion reais related to the agreement this year.

Vale shares, suspended for the announcement, reopened up 2.3%, then pared gains to close down 1.3%. On Wednesday, as initial information of the agreement emerged, shares jumped 3%.

Brazil’s most deadly mining tragedy has hampered Vale’s performance over the past two years as it was forced to curb production amid new safety protocols.

The government of Minas Gerais, where the disaster occurred, said the agreement does not set a ceiling on potential costs associated with the environmental cleanup, which Vale will have to cover.

It also does not interfere with any criminal cases against Vale personnel, the government said.

About 5.5 billion reais of the overall payment will come from a judicial escrow account that has held Vale funds during the litigation process, said a source with direct knowledge of the matter.

Vale will pay out the remainder of its obligations biannually over the course of no more than six years, the source said.

Leonardo Correa, analyst at BTG Pactual, said in a note the agreement appeared positive for the company and was significantly lower than the 54 billion reais the government had initially wanted. According to Correa, the positives also went beyond the headline figure.

“This is not really about numbers, this is more about putting an overhang source behind the company and turning the Brumadinho page,” he said, referring to the town where the dam collapsed.

On Wednesday, Vale reported lackluster annual production figures, but flagged a potential rebound in both output and sales in 2021.

Vale said it closed 2020 with 322 million tonnes of annual iron ore production capacity, and it expects that number to rise to 350 million tonnes by the end of 2021.

$1 = 5.43 reais Reporting and writing by Marta Nogueira and Tatiana Bautzer; Additional writing by Gram Slattery; Editing by Christian Plumb and Marguerita Choy

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