By Danilo Masoni and Foo Yun Chee
MILAN/BRUSSELS Jan 20 (Reuters) - The Panama Canal Authority (PCA) has turned down an offer by the European Commission to mediate in a multi-billion dollar dispute with a Spanish-led construction consortium which threatens to halt work on widening the century-old waterway.
The consortium, known as Grupo Unidos por el Canal (GUPC), had threatened to suspend work by Monday unless the Panama Canal Authority (PCA) paid $1.6 billion in cost overruns on one of the world's largest construction projects. But on Sunday the group backed down from the threat.
The European Commission said on Monday GPUC, led by Spanish builder Sacyr, had requested mediation by the European commissioner for industry Antonio Tajani, who accepted.
But the PCA immediately rejected it.
"The contract over a third set of locks has already mechanisms to resolve disputes and none of them includes the intervention of a third party," PCA said in a statement.
"This will only be dealt with in accordance with what the contract says," it also said.
Earlier on Monday Tajani had told Reuters by telephone he believed a compromise could be found allowing Panama to have the work done and the European companies not to lose the contract.
"In the meantime it is important that the deadline date (to stop work) be put back. This is the first step and it looks to me as if we are heading in this direction," he had said.
Tajani also said he had spoken with the Italian and Spanish foreign ministers and would now discuss the issue with the European Investment Bank, which financed the project, and the representatives of Panama in Brussels.
GUPC - which also includes Italy's Salini Impregilo SpA , Belgium's Jan De Nul and Constructora Urbana from Panama - won the contract in 2009 to build a third set of locks, the main part of the project to double capacity of the near 50-mile (80 km) cargo route.
The consortium's winning bid was $1 billion lower than that of its nearest rival.
The entire project was due to cost about $5.25 billion, but the overruns could bump that up to nearly $7 billion.
GUPC is set to meet with the PCA and insurer Zurich North America on Tuesday to discuss the status of the work, including its $600 million bond on the locks project.
Canal Administrator Jorge Quijano has said the PCA is already in discussions with other third-party contractors in case it cannot resolve its dispute with the GUPC. He estimated the remaining work would cost about $1.5 billion.
The canal authority has said it is willing to consider detailed claims for the overruns through arbitration.
The canal is one of the world's most important shipping routes and halting construction on the project would be a setback for companies eager to move larger ships through the waterway such as liquefied natural gas (LNG) producers who want to ship exports from the U.S. Gulf coast to Asian markets.