* Sources say Vimpelcom considering arbitration
* Firm in talks to sell Algeria control of Djezzy unit
* Negotiations deteriorated over $1.25 bln fine
* Vimpelcom shareholders had hoped for quick resolution
ALGIERS, April 5 (Reuters) - Talks between Vimpelcom and Algeria over the future of the Russian group's Djezzy Algerian mobile phone unit have soured since the imposition last month of a $1.25 billion fine on Djezzy, according to sources on both sides.
Vimpelcom, 35 percent owned by Norwegian group Telenor ASA , is now considering seeking international arbitration over the fine, said the sources, an Algerian official and a person close to the Russian firm.
The two sides had been close to concluding a deal under which the Algerian state would have acquired a 51 percent stake in the Djezzy mobile phone business from Vimpelcom, ending a prolonged row that has hurt the parent company's share price.
But the fine has jeopardised that deal, the sources said, dimming the company's hopes that it can get a multi-billion-dollar payout from Algeria in exchange for the stake and start operating lucrative Djezzy as a viable concern.
Following the announcement of the fine, "relations ... have deteriorated to the point that international arbitration is becoming a very likely option to find a solution to the fine issue," the Algerian official, who is familiar with the discussions, told Reuters on condition of anonymity.
Vimpelcom is expected on Sunday to lodge an appeal in an Algerian court against the $1.25 billion fine. It was imposed after a judge ruled that Djezzy had made false statements to the Algerian central bank about currency transactions.
The sources said that Algeria wants the fine deducted from the amount it pays Vimpelcom for its controlling stake.
But Vimpelcom does not want the fine deducted from the deal price, said the source close to Vimpelcom, also speaking on condition of anonymity. The source confirmed to Reuters that Vimpelcom was considering international arbitration.
Vimpelcom was not immediately available for comment by phone and did not respond to an emailed request for comment. Algeria's finance ministry, which is handling the negotiations, could not be immediately reached.
Russia-focused Vimpelcom acquired Djezzy last year as part of a $6.6 billion deal to buy assets of Egyptian firm Orascom Telecom, but the transaction immediately became clouded in uncertainty because the Algerian government demanded a majority stake in Djezzy.
Vimpelcom eventually agreed to sell Algeria a 51 percent stake in the unit, subject to a deal on the price and on the understanding it would stay on as operator. Since then though, there has been wrangling over the price.
An Algerian government source told Reuters last week that Algeria had agreed to pay $6.5 billion for the 51 percent share, though analysts cast doubt on that figure, saying it was well over their estimates for the value of the stake.
Algeria's Finance Minister Karim Djoudi dampened any expectations of a quick deal last week when he said no price was agreed and talks could go on for months.
PROGRESS TOWARDS DEAL
A document seen by Reuters relating to talks between Vimpelcom and the Algerian state at the end of last year suggests that, before the row broke out over the fine, they were making good progress towards a deal.
The draft "agreement protocol" did not contain any deal on the price but it went into detail about the mechanisms and terms for Algeria to take over the controlling stake, even going as far as to detail the press release which will announce the deal.
It also states that within three months of the deal being signed, restrictions that prevent Djezzy's parent company repatriating profits would be lifted.
The document even raised the prospect of Djezzy, once the deal was finalised, bidding for Algeria's first 3G mobile telecoms license.
However, the document, dated Dec. 25, 2011, also set out a deadline for concluding a deal which the two sides have already missed.
It says the negotiations should be concluded by Feb. 28, 2012, or failing that can be extended by the agreement of both sides up to March 15 this year at the latest.