CORRECTED-UPDATE 2-Premier strikes $1 bln deal to pump Falklands oil

(Corrects distance in fifth paragraph to 120 kilometres from 400)

* Premier to pay Rockhopper $231 mln for 60 pct stake

* Premier to provide additional $770 mln for development

By Sarah Young

LONDON, July 12 (Reuters) - Britain's Premier Oil agreed a $1 billion deal intended to transform the remote UK-governed Falkland Islands into an oil producer, a move that could inflame tensions with Argentina over sovereignty.

Argentina, which thirty years ago fought a war against Britain over the islands it calls the Malvinas, claims the Falklands as its own and has sought to disrupt oil exploration there.

Premier said on Thursday that it would partner Rockhopper , an explorer that made an oil discovery in the Falklands in 2010, paying it an initial $231 million in cash as well as providing around $770 million to help build infrastructure.

"We view this transaction as very positive for Rockhopper, although the upfront payment appears to be somewhat light, as its resolves a major funding issue for the company with respect to the Sea Lion development," Westhouse analysts said.

Shares in Rockhopper, which has been looking for a partner to help it develop the Sea Lion field about 120 kilometres off the north of the Falkland Islands, was up 0.3 percent to 274 pence at 0943 GMT, paring earlier gains of around 15 percent.

Premier dismissed concerns about investing in the politically sensitive project which has prompted Argentina to threaten legal action against oil firms active in the Falklands for what it sees as "illegal" drilling.

"I don't want to sound flippant, but the oil industry deals with this type of political risk, of border disputes, of disputed territories all around the world, frankly," Premier's Finance Director Tony Durrant said in a telephone interview with Reuters.

Oil is expected to start pumping in the Falklands in mid-2017, said the partners, news unlikely to be welcomed by Argentina, which in a bid to boost its own oil production controversially nationalised oil firm YPF in April.

Shares in Premier were up 3.2 percent to 370.27 pence, although analysts were less certain on what the deal meant for the company.

"Time will tell. Sea Lion is a complex and remote development but the fiscal terms are attractive," said Numis analyst Sanjeev Bahl.

The deal, which will give Premier a 60 percent stake in the Sea Lion oil field, will add about 200 million barrels of oil to its resources - a substantial boost. The Sea Lion field is large in comparison to fields in the North Sea, although small fry compared with the around 50 billion barrels of oil thought to lie offshore Brazil.

Durrant added that Premier was providing Rockhopper with a future possible financing facility should the company not be able to raise the debt to pay its part of development costs.

"It's very difficult (to raise debt) at the moment and that of course if one of the reasons why we've been able to negotiate a very attractive deal. The Argentinean situation doesn't help but it's much more the state of the capital markets at the moment," he said.

The partners said they expected the deal, which is subject to approval by the Falkland Islands Government, to complete in September. ($1 = 0.6426 British pounds) (Reporting by Sarah Young. Editing by Erica Billingham)