* Paves way for PZU IPO, planned for next year
* Poland, Eureko to jointly sell 20 percent stake
* Zloty recovers after concerns over Eureko's conversion
By Chris Borowski and Adrian Krajewski
WARSAW, Oct 2 (Reuters) - Poland agreed on Friday to pay Dutch group Eureko 4.8 billion zlotys ($1.6 billion) as part of a deal to settle a decade-old ownership dispute over Polish insurer PZU, paving the way for its listing.
The fight, which broke out when Poland walked away from promises to cede control after partial privatisation of PZU, had stained Warsaw's reputation among foreign investors and could have cost the country as much as $12 billion in damages.
"This is the most important day of my term at the ministry," Treasury Minister Aleksander Grad told a news conference. "Eureko has withdrawn its arbitration case, which Poland lost ... PZU will debut on the stock market, which we hope will take place next year."
Poland will pay Eureko 3.55 billion zlotys from the treasury, part of a 12.75 billion zlotys dividend payout by PZU, eastern Europe's largest insurance group. Eureko will also receive its own third of the dividend.
In addition, Poland will transfer to Eureko 1.22 billion from proceeds of the sale of Poland's 5 percent stake in PZU which it will put into a special investment vehicle ahead of the offering.
Eureko will contribute a 10 percent stake to the vehicle, and will also sell another 5 percent in the listing on its own. Analysts estimate PZU is worth some 36 billion zlotys, valuing the planned listing at 7.2 billion.
Following the IPO, Poland will own 50 percent of PZU and Eureko 18 percent, which it would be able to gradually decrease after the listing.
Concerns that Eureko would convert the payout into euros, flooding the market with the Polish currency, have helped to drive the zloty to its lowest level in two months.
The zloty turned positive in the Friday session after the details of the deal were announced to bid at 4.2415 to the euro, up 0.6 percent.
In a conference call, Eureko Chief Financial Office Gerard van Olphen said the Dutch insurance group had hedges in place for a large amount of zloty proceeds from the PZU agreement. ($1=2.946 Zloty) (Additional reporting by Maciej Onoszko in Warsaw and Gilbert Kreijger in Amsterdam; Editing by Jon Loades-Carter)