UPDATE 1-Diamond Resorts to acquire Sunterra for $16/shr

(Adds details, CEO's comment, stock movement)

BANGALORE, March 12 (Reuters) - Diamond Resorts LLC said it agreed to acquire time share vacation company Sunterra Corp. (SNRR.PK) for $16.00 a share in cash to strengthen its position in the vacation ownership industry.

Shares of Sunterra were up more than 5 percent at $15.72 in morning trade on the Pink Sheet market.

The transaction is valued at about $700 million, including $375 million of existing debt, the company said in a statement.

Privately-held Diamond Resorts said its affiliate will commence a tender offer for all of Sunterra's outstanding common stock within the next five business days.

When asked whether the company would consider raising the offer price if shareholders do not tender their stock, Chief Executive Stephen Cloobeck said by phone, "Our offer of $16 a share is very lucrative as it offers a 35 percent premium over the closing price of Sunterra's common stock on March 8."

On job cuts, Cloobeck said, "We will retain all the staff of Sunterra." Diamond Resorts also said Sunterra will remain headquartered in Las Vegas, Nevada, following the acquisition which is expected to close in the second quarter.

In a separate statement, Sunterra, which faces lawsuits over financial reporting practices and a U.S. Securities and Exchange Commission investigation, said the transaction value was "fair."

In early August, the company had hired Merrill Lynch to review strategic alternatives.

The company had dismissed Chief Executive Officer Nicholas Benson in July last year, after an accounting investigation and appointed a shareholder, John Ziegelman, as chairman. Ziegelman advocated the company be sold.

Sunterra's board approved the acquisition and recommended shareholders accept the offer. (Reporting by Rakesh Sharma in Bangalore)