UPDATE 1-AbitibiBowater repays $166 mln of DIP loan

* Says now has $40 mln outstanding under DIP loan

* Pays amendment fee of about $1 mln

* Extends loan to Dec. 31, modifies covenants

July 26 (Reuters) - Bankrupt Canadian newsprint producer AbitibiBowater Inc ABWTQ.PK said it repaid $166 million of its debtor-in-possession (DIP) loan following an improvement in market conditions and operational performance.

In regulatory filings with the U.S. Securities and Exchange Commission, the company said it now had $40 million outstanding under the loan.

Companies rely on DIP financing to fund operations while in bankruptcy.

AbitibiBowater also extended the DIP loan to Dec. 31, 2010, and modified certain covenants. It now has the ability to retain the proceeds from asset sales without triggering a mandatory prepayment.

The amendment fee amounted to about $1 million.

The company, based in Montreal, but incorporated in the United States, crumpled under an overwhelming debt load and filed for bankruptcy protection in April 2009.

As part of its reorganization, the company plans to offer unsecured creditors from dozens of subsidiaries stock in the reorganized company and rights to participate in a $500 million sale of new shares.

That rights offering money along with $1.6 billion in exit financing would pay off secured creditors and fund the company's operations on its emergence from bankruptcy later this year.

The case is In re: AbitibiBowater Inc, U.S. Bankruptcy Court District of Delaware (Delaware), No: 09-11296. (Reporting by Santosh Nadgir in Bangalore; Editing by Vyas Mohan)