(Recasts, adds details of possible offer expansion,background)

By Brian Ellsworth

RIO DE JANEIRO (Reuters) - Brazilian state oilcompany Petrobras Friday filed to sell up to $64.5 billionof new stock -- the largest in capital markets history -- toraise funds for the world's biggest oil exploration investmentplan.

The offer could be expanded to as much as $74.7 billion ifunderwriters exercise a "greenshoe" option to sell anadditional 564 million shares stock to meet extraordinarydemand.

That would top the $22.1 billion IPO by Agricultural Bankof China earlier this year, as well as the $36.8billion share offer by Japanese telecommunications company NTT in 1987.

The company said in a statement it will offer 1.59 billionnew preferred shares and 2.17 billion new commonshares, for an operation that includes a $43 billionstate-backed swap of oil for shares.

At Thursday's closing price for the stocks, the companywould raise 67.8 billion reais ($39.2 billion) from the sale ofcommon shares and 43.8 billion reais ($25.4 billion)from the preferred shares.

Petrobras expects to begin bookbuilding Sept. 3, and pricethe share sale on Sept. 23.

The plan has become the financial cornerstone of thecompany's $224 billion, five-year investment plan meant to turnBrazil into a major oil exporter by tapping oil buried deepunder the ocean floor in a region known as the subsalt.

[ID:nN02ETROBR] [ID:nN03264189

http://link.reuters.com/kev98

The company faces skepticism from investors who havequestioned the high price for the oil reserves to be used inthe oil-for-shares swap, which has sparked fears Petrobras maybe overpaying for the assets and diluting shares.

Under the terms of the $43 billion oil-for-shares swap,Petrobras said on Wednesday it agreed to exchange part of thestock to be issued for development rights to 5 billion barrelsof offshore oil at a price of $8.51 per barrel -- far above the$5 to $6 per barrel that markets saw as fair.

The swap will endow Petrobras with valuable oil reserves.

The segment of the share sale outside the oil-for-shareswap is primarily targeted at non-government and minorityshareholders, who will will provide the only cash in theoperation.

Their participation will be crucial for Petrobras to shoreup its balance sheet, which has been stretched by heavyborrowing to finance its ambitious offshore plans.

Government leaders have also said they plan to boost thestate's participation in the company's capital to around 40percent from current levels near 30 percent, which has leftsome investors nervous about greater state sway in thecompany.

Analysts said the large size of the swap of oil for shareswith respect to the entire stock sale -- authorized byshareholders for up to $85 billion -- shows the governmentexpects it will be able to pick up a considerable number ofshares not subscribed by private investors.

INVESTOR INTEREST

But some investors say those concerns have already beenpriced into the shares and that the company is still acompelling investment given its unique access to quality oilreserves in a world that is quickly running out of them.

"I think people are going to be surprised by the number ofinvestors that subscribe," said Marc Fogassa, a managingpartner at Hedgefort Capital Management, which owns shares inPetrobras.

After months of uncertainty over the plan that pushedPetrobras shares down by as much as 25 percent from the startof the year, progress advancing the issue has heartened someshareholders.

"The worst of the slaughter is behind us," said MarcioMacedo, who oversees about $40 million of assets at HumaitaInvestimentos in Sao Paulo. "The stock's value is nowattractive."

He added that many investors spent the last several monthsselling or shorting Petrobras to go long in other sectors suchas Brazilian banks or retail, and he expected many would takeadvantage of this offer to get back into the company.

Oil for the exchange will come from at least six fields inthe subsalt region, most of which are adjacent to majoroffshore discoveries such as Franco and Tupi finds.

The offer will be led by Banco Bradesco in coordinationwith Bank of America Merrill Lynch, Banco Bradesco, Citigroup,Banco Itau, Morgan Stanley, and Banco Santander Brasil. Theoffer will also be co-managed by BTG Pactual and Banco doBrasil. (Additional reporting by Elzio Barreto; Editing by W Simon andSteve Orlofsky)