* Board seen strongly backing preliminary $5 billion deal
* Companies, governments keen to end 18-month crisis
* Argentina seen paying U.S.-dollar-denominated bonds
* Shares in Repsol and major shareholders up sharply
By Carlos Ruano and Tracy Rucinski
MADRID, Nov 26 (Reuters) - Oil major Repsol looks likely to settle an 18-month conflict with Argentina after Buenos Aires offered $5 billion in compensation for assets it seized last year - less than half what the Spanish group had demanded and in bonds, not cash.
Repsol's board is expected to approve the deal on Wednesday, sources close to the board said. However, details are not yet known of the structure of the bonds offered by Argentina, which has little credibility on international markets after its massive default in 2002 and subsequent debt restructuring.
President Cristina Fernandez's government seized Repsol's 51 percent stake in Argentine energy group YPC last year. This infuriated Repsol and the Madrid government, and also raised tensions between Spain and Mexico, a major shareholder in Repsol through its state oil monopoly Pemex.
Pemex, which has close ties to YPF, had criticised Repsol Chairman Antonio Brufau's handling of the dispute, which had become a source of boardroom discontent over the past year.
Repsol shares surged on hopes for an end to the long standoff that could allow the company to concentrate on its strategy to boost oil production through new investments.
The company has been trying to sell its 30 percent stake in Spanish utility Gas Natural, worth about $7 billion, to raise funds for exploration and production assets in North America, but no deal has materialised yet.
Repsol had originally sought $10.5 billion from Buenos Aires and under the deal will be paid in bonds by an Argentine government that is suffering a flight of dollar reserves and risks defaulting again on its sovereign debt next year.
"(This is) not ideal from (Repsol's) perspective. It's half what they wanted and I suppose they would rather have the cash now," said Stuart Culverhouse, head of research at brokerage Exotix. "What kind of bonds are they? So they suffer twice. But Argentina simply doesn't have the cash."
One source close to the board said the settlement was drawn up by Brufau himself, under pressure from the Spanish government and shareholders to put an end to legal wrangling.
"The initial agreement already has the backing of Repsol's management, its main shareholders and the governments, meaning that with all probability the board will give the green light," the source said.
Another source, close to another board member, said the main thrust of the deal was positive for Repsol and was highly unlikely to be rejected.
Repsol's shares climbed 4.39 percent to 19.36 euros per share, a top gainer on a flat blue chip Spanish index, with analysts estimating that a $5 billion compensation deal would add 2.85 euros to Repsol's shares.
Some investors were weighing the true value of Argentina's offer, expected to be in U.S.-dollar-denominated 10-year government bonds with some kind of guarantee or collateral.
Argentina currently has a treasury bond that expires in 2017 and pays an annual 7 percent coupon and trades on the secondary market with a discount of around 10 percent.
In other recent compensation offers, companies received Argentine bonds issued under Argentine law, rather than international law. This meant many investment funds cannot buy them under their rules, making them less liquid and leaving fewer recourses for investors in a restructuring or default.
"We need to have more information on how Repsol would monetize $5 billion in Argentina bonds," Filipe Rosa, analyst at Espirito Santo said in a note to clients.
Argentina has been at loggerheads with the global markets since its 2002 sovereign bond default and subsequent interventionist economic policies.
The chances of another default have risen due to a court battle between Argentina with dissident bondholders who refused to take part in two debt restructurings and insist on being paid in full. Earlier this month, a federal appeals court in New York rejected Argentina's request to reconsider an earlier order requiring that the bondholders be paid $1.33 billion.
The conflict with markets has hindered Argentina's ability to attract foreign capital for exploring
A credible deal with Repsol is crucial for restoring confidence in Argentina and bringing in foreign partners to invest the billions of dollars needed to exploit its Vaca Muerta shale oil and gas field, one of the biggest in the Western Hemisphere, with YPF.
Repsol is likely to sell its remaining 12 percent stake in YPF following the deal, with a market value of $1.3 billion on Monday, Espirito Santo's Rosa said.
Shares in Repsol are up 22.19 percent this year. The YPF deal could also encourage some of Repsol's main shareholders to cash in on the share price rise by selling their stakes.
Pemex had already registered that half its 9.4 percent stake in Repsol as available for sale and could use proceeds to invest in Vaca Muerta or its own offshore fields.
Repsol's second largest shareholder, indebted Spanish builder Sacyr, has been considered a seller at the right price. A YPF deal could bring Repsol's shares above 19.9 euros each, the amount at which Sacyr carries them in its books.
Repsol's largest shareholder, banking powerhouse La Caixa, is also reducing its stake through an exchangeable bond issue, though its longer-term plans in the company remain unclear.
Sacyr's shares were 5.8 percent higher at 3.859 euros each in Tuesday trading, while Caixabank, La Caixa's listed banking business rose 1.2 percent to 3.6 euros.