UPDATE 1-Dispute simmers over big Petaquilla copper project

(Adds Teck Cominco reaction, details, background, changes dateline, previously New York)

MONTREAL, April 29 (Reuters) - Petaquilla Copper Ltd PTC.TO said on Tuesday it believes Teck Cominco Ltd's (TCKb.TO) interest in the massive Petaquilla copper project in Panama has lapsed, a position Teck quickly refuted.

The companies' comments suggested a dispute is simmering behind the scenes over plans to develop the $3.5 billion project, which is seen producing 4.4 million tonnes of copper over 23 years.

In a statement, Petaquilla said it had delivered a notice to Teck seeking arbitration on the matter. Petaquilla said Teck failed to satisfy the preconditions for making a final commitment to the project.

"Teck Cominco's interest in the Petaquilla Copper Property has now terminated," Petaquilla said.

"The Petaquilla Copper Property is now owned by Petaquilla Copper as to a 52 percent interest and by Inmet Mining Corp (IMN.TO) as to a 48 percent interest," it added.

Teck dismissed the statements made by Petaquilla Copper.

"We believe that the allegations made by Petaquilla Copper are without merit and that we acted in accordance with our rights and responsibilities in the agreement," Teck Cominco spokesman Doug Horswill told Reuters.

"We will vigorously defend ourselves and our position," he said.

In late March, Inmet had said it could develop the Petaquilla by itself if partner Teck exercised its option to back out of the development within the next 18 months.

Under its existing deal with Teck, Inmet would fund development of Petaquilla until the end of September 2009, when Teck has the option to take a 26 percent stake in the project in return for providing 52 percent of the funding.

If Teck backed out, Inmet would purchase Teck's 26 percent stake, giving it about three-quarters of the project.

Teck had the option to acquire its stake from Petaquilla Copper Ltd, which currently owns 52 percent of the Panamanian company that holds the Petaquilla concession. Inmet has a 48 percent interest in Petaquilla.

The mine's development costs have more than doubled in the past year due to enhanced erosion control and water management, as well as rising equipment and construction costs. (Reporting by Robert Melnbardis; Editing By Ovais Subhani)