* Protesters urge Rousseff to veto royalty bill
* Rousseff plans partial veto - source
* Rio says bill would cripple finances, World Cup, Olympics
By Paulo Prada
RIO DE JANEIRO, Brazil, Nov 26 (Reuters) - As many as 200,000 people demonstrated in Rio de Janeiro on Monday to urge Brazilian President Dilma Rousseff to veto a bill that local officials say could cost Rio state billions of dollars in lost oil revenue and cripple plans to host the World Cup and Olympics.
Late Monday, a person familiar with the president's plans said Rousseff is indeed planning to veto at least part of the bill, particularly a portion that redefines royalty payments for existing oil production in Brazil.
The president, the person added, instead will propose that Rio and Espirito Santo, the two states with most of Brazil's existing oil output, continue to get a level of royalties from current production similar to what they received last year. The partial veto would not change parts of the bill that redefine oil royalties from production at new fields.
For Rousseff, the protest raised the stakes on what may be the most sensitive decision she has faced in her nearly two-year-old government: How to distribute tens of billions of dollars in expected revenues from a massive offshore oil find that Brazil discovered in 2007.
The bill, passed by Congress this month, would spread the windfall more evenly to Brazil's 26 states and federal district. As submitted for her approval, however, it would also alter royalties on existing production, angering Rio and other southeastern states where most of Brazil's oil is located.
Rousseff has until Friday to veto the bill, but is expected to decide on the partial veto on Thursday, the person said.
Monday's event by early evening had attracted about 200,000 demonstrators, according to police calculations.
The protest began with a march through Rio's colonial center and was followed by a series of speeches, concerts, and impromptu revelry that at times gave it a festive air. In recent days, state officials plastered streets and buildings with banners advertising the protest in large black and white lettering and a command in red for the president: "Veto, Dilma."
Rio is spending tens of billions of dollars to build stadiums and other infrastructure for soccer's World Cup in 2014 and the 2016 Summer Olympics, two marquee events expected to attract hundreds of thousands of visitors.
Rio Governor Sergio Cabral, a key ally of the president, led the protest. He has cast the debate in dire language that analysts say may exaggerate the actual financial stakes but has nonetheless intensified political pressure on Rousseff.
"This bill will cause the financial collapse of the state of Rio de Janeiro," Cabral warned earlier this month. "There would be no Olympics, no World Cup, no payments for retirees and pensioners."
Approving the bill could hurt Rousseff's relations with Cabral's PMDB party, a large and ideologically shape-shifting group that is a lynchpin of the broad coalition that supports her ruling Workers' Party.
Rousseff has vowed to further Brazil's efforts to reduce poverty, in part by redistributing the windfalls from its growing commodity exports - from oil and iron ore to foodstuffs.
Throughout the day Monday, police had cordoned off large swaths of Rio's center, along the river-like bay that gives the city its name. State and municipal officials were facilitating attendance by waiving subway and ferry fees and providing buses from far-flung towns outside the capital.