* Wins 3-month extension on $600 mln 2-year loan
* Government settles long-running contract payment row
* Contract row had threatened Kenya's credit assessment
* Govt official "hopeful" Eurobond can be completed (Adds government decision to settle long-running contract row)
NAIROBI, May 15 Kenya has won a three-month extension on a $600 million syndicated loan, a Treasury official said on Thursday, giving it time to continue discussions on its delayed debut dollar bond.
The government also said it had reached a deal to settle a long-running row over paying past contracts that had threatened plans for the Eurobond, which could be worth up to $2 billion.
The east African nation took out the two-year syndicated loan at an interest rate of 7 percent in 2012 to fund development projects. It had intended to use some of the proceeds of the planned Eurobond to pay it off.
Kamau Thuge, the Finance Ministry's principal secretary, said he was "hopeful" the bond issue would be completed, otherwise he said the loan would be paid from foreign reserves.
Underwritten by Citigroup, Standard Chartered and Standard Bank, the $600 million loan was due to be repaid on May 16.
"What we have done is just to extend the repayment ... by another three months as we continue discussions on the sovereign bond," Thuge told Reuters.
The Eurobond has been delayed by volatile market conditions and by the dispute over contract payments, which parliament said should not be made because the deals from a decade or more ago were awarded in violation of the law by past governments.
The current government said failure to pay would threaten Kenya's reputation as a borrower because a Swiss and British court had ordered that payment be made. That, in turn, could threaten demand for the bond issue.
A government said a deal to settle the row with the claimant was reached, involving total payment of $16.4 million, a sum it said was negotiated down from $18.8 million.
"The settlement will also protect Kenya's reputation as a country that meets its contractual obligations and adheres to the rule of law," the government said in a statement released by the president's office.
REPUTATION AT RISK
A group of lawyers had asked the Kenyan high court to stop the government from paying, a request the high court declined last week. The lawyers are appealing against the ruling.
The government said on Thursday that this was a sensitive period because of the Eurobond plan.
"The issuance cannot take place unless all obligations related to the court awards are paid," the government said. "The stoppage would irreparably injure Kenya's reputation as it prepares to launch its debut bond."
Other African nations also have plans for Eurobonds, but some have suggested they could pull them because the price of such issues has risen. The U.S. Federal Reserve's moves this year to scale back its bond-buying programme have dampened investor interest in emerging markets.
Ratings agency Fitch said Kenya's extension of the syndicated loan highlighted the refinancing risk some African nations faced as they turned to international markets for financing rather than relying on concessional loans.
But Fitch, which affirmed Kenya's rating of "B+" with a stable outlook in January, said it would not be changing the rating and said Kenya's foreign reserves would still be comfortable if it had to use them to repay the syndicated loan.
The central bank had foreign exchange reserves of $6.23 billion, equivalent to 4.36 months worth of import cover, at the end of February.
($1 = 87.3500 Kenyan shillings) (Editing by Edmund Blair and Susan Fenton)