By Walter Gibbs

OSLO, Oct 6 (Reuters) - DNO International estimated it wouldhave to pay $55-75 million to former U.S. diplomat PeterGalbraith and a Yemeni firm for their stakes in a 2004 deal thatbrought the Norwegian oil company to Iraq.

The amount, which DNO said was "very early and preliminary",was more than four times its previous estimate of what it wouldhave to pay in a London-based arbitration case.

DNO shares initially fell on the news, but were up 2.3percent at 9.69 Norwegian kroner by 0949 GMT, against a 0.98percent rise in the benchmark Oslo Stock Exchange index.

"A lower share price today should be treated as a buyingopportunity due to reduced uncertainty related to the size ofthe award, and could trigger a takeover bid on the company, withRAK Petroleum the obvious candidate," analyst Trond Omdal ofArctic Securities said.

RAK, whose board includes former U.S. ambassador to IraqZalmay Khalilzad, owns 30 percent of DNO's shares.

In its year-end accounts for 2009, DNO set aside $12 millionfor arbitration damages, and said Wednesday that the final award"is expected to imply additional loss of $45-65 million in thecompany's accounts for the third quarter of 2010."

"Assuming a final award in line with our preliminarycalculations, we are able to fully cover the estimated range ofdamages from our cash reserves," Helge Eide, DNO's managingdirector and president, said in a statement.

In a phone interview with Reuters, Eide acknowledged thatGalbraith was one of the claimants in the case and helped thecompany gain exploration and production rights from the KurdishRegional Government in northern Iraq in June 2004.

Eide said the other party in the case was a companycontrolled by Yemeni businessman Shaher Abdulhak.

"Peter Galbraith and the company owned by the family ofShaher Abdulhak are the claimants here," Eide said. "That hasbeen known, but to give any further comments in that respect isnot for us to do."

In its press release on Wednesday the company declined toname its arbitration adversaries, calling them only "third partyinterests".

Galbraith and Abdulhak could not immediately be reached forcomment.

U.S. DIPLOMAT

Galbraith, son of the American economist John KennethGalbraith, is a former U.S. ambassador in Europe who served asdeputy chief of the United Nations mission in Afghanistan lastyear.

U.N. Secretary General Ban Ki-Moon fired Galbraith after apublic dust-up in which Galbraith accused Kabul Mission ChiefKai Eide, who is not related to DNO's Helge Eide, of doing toolittle to stop voter fraud in Afghanistan's presidentialelection. For decades a champion of Kurdish rights, Galbraithwas not employed as a diplomat at the time he helped negotiateDNO's entry into Iraqi Kurdistan.

Asked on Wednesday if he had ethical qualms about engaging aformer diplomat, Eide said Galbraith had the regional expertisethe company lacked.

"We were dealing with a person who had extensive politicalknowledge from the region, which we considered valuable when wewere in the early stages of the project," he said.

He declined to say what Abdulhak's role in the case was.

DNO produced oil for export from its Tawke field inKurdistan from June 1 to Sept. 22, 2009, reaching peakproduction of about 50,000 barrels per day.

Exports were halted, however, after Iraq blocked revenue toDNO and other oil producers that signed production-sharingcontracts with the regional government.

Iraq, angered at being bypassed, has called the KRG'scontracts with international oil producers like DNO illegal andblacklisted them from opportunities in southern Iraq. (Editing by Sharon Lindores) ($1=5.808 Norwegian Crown)