UPDATE 3-MMC settles 5-year-old suit tied to Spitzer claims

* MMC pay $400 mln in settlement

* Suit related to sharp drop in stock price

* Lead plaintiffs were pension funds in New Jersey, Ohio

* MMC says more than half the cost to be paid by insurance (Adds details on average recovery, paragraphs 4-6)

NEW YORK, Nov 13 (Reuters) - Insurance broker Marsh & McLennan Cos Inc (MMC.N) will pay $400 million to settle a securities class-action lawsuit stemming from a sharp drop in its stock five years ago after New York state charged the company with improper business practices.

The settlement, announced Friday, is subject to court approval and will resolve all claims in the matter without the company admitting any wrongdoing.

State pension funds in New Jersey and Ohio were the lead plaintiffs in the lawsuit, brought on behalf of investors who owned MMC shares in the five years prior to the New York state charges. The suit accused MMC of making "false and misleading statements to investors" related to commission payments it received from insurers.

All shareholders will be treated equally in the settlement. New Jersey Attorney General Anne Milgram estimated the recovery recovery will average about 77 cents per share, depending on factors including how many claims are filed and when shares were sold or bought.

New Jersey Assistant Attorney General Carol Jacobson, contacted by phone, said the state lost as much as $16 million when MMC's stock dropped and stands to recover $1.8 million to $3 million.

"We are a very small drop in the bucket compared to the class (of shareholders)," Jacobson said.

For MMC, the settlement is one more step in the long process of moving beyond a painful investigation into its practice of taking lucrative so-called contingent commissions and kickback payments in years past for placing business with certain carriers.

The company paid $850 million into a fund to compensate U.S. policyholders in January 2005 and instituted reforms to settle the New York state charges, brought by then-Attorney General Eliot Spitzer.

The company's stock price fell by more than half following Spitzer's allegations.

MMC, the largest global insurance broker by market capitalization, said it expects to recoup more than half the $400 million settlement payment from insurance coverage. The balance will be funded with cash on hand and will be tax-deductible, it said.

Investors in the class-action group have until Dec. 14 to opt out of the settlement, according to the New Jersey Attorney General's Office. A final approval hearing is scheduled for Dec. 23. (Reporting by Lilla Zuill; additional reporting by Joan Gralla; Editing by Matthew Lewis, Phil Berlowitz and John Wallace)