UPDATE 2-WaMu and FDIC expect settlement this week

* WaMu, FDIC deal would clear way to exit bankruptcy

* FDIC objected to releases from enforcement actions

* WaMu to file new agreement on Friday

* WaMu shares down 5.7 percent (Adds bullet points, byline, details and background from paragraph four)

By Tom Hals

WILMINGTON, Del., May 19 (Reuters) - Washington Mutual Inc WAMUQ.PK and the Federal Deposit Insurance Corp expect to reach a settlement by Friday to resolve legal disputes, a key to ending a bankruptcy stemming from the biggest bank failure in U.S. history.

The FDIC board should sign the settlement agreement on Friday, Thomas Califano of DLA Piper, the law firm that represents the government agency, said after a bankruptcy court hearing.

He earlier told the Delaware Bankruptcy Court that talks this week had "positively addressed" the concerns of the FDIC.

The FDIC said in court papers last week that it objected to the way the reorganization would have released Washington Mutual executives from enforcement actions.

Washington Mutual said it would file the settlement agreement by Friday, along with an amended disclosure statement that describes its reorganization plan.

The company had originally planned to send that statement to creditors this week so they could begin voting on the plan. Now voting cannot begin until after a June 3 hearing on the disclosure statement.

The FDIC sold Washington Mutual Bank to JPMorgan Chase & Co (JPM.N) in September 2008, at the height of the financial panic, after regulators seized the lender.

The next day Washington Mutual filed for bankruptcy. It has spent most of its stay in Chapter 11 on lawsuits involving the FDIC or JPMorgan.

The settlement, which has the support of JPMorgan, will end those disputes, clearing the way for Washington Mutual to reorganize as a mortgage insurer and investment company with valuable tax breaks. The company plans to sell shares to fund its exit from bankruptcy and reorganization.

Washington Mutual has said it expects to have about $7 billion to distribute to creditors.

Among those unlikely to recover anything are common stockholders, who have argued that the company's plan of reorganization releases various parties from potentially lucrative lawsuits without proper compensation.

Shares of Washington Mutual were down 5.7 percent at less than 12 cents in afternoon pink sheet trading.

The case is In re Washington Mutual Inc, U.S. Bankruptcy Court, District of Delaware (Wilmington), No. 08-12229. (Reporting by Tom Hals; Editing by Lisa Von Ahn)