CORRECTED - Valero says progress seen on Tennessee gasoline rule

(Corrects quote in second paragraph, adding word help)

HOUSTON, May 27 (Reuters) - Valero Energy Corp (VLO.N) said on Wednesday progress was being made to modify a proposed law in Tennessee that threatens the future of the company's 195,000 barrel per day (bpd) refinery in Memphis, Tennessee.

"It looks like those concerns will be alleviated and that will help assure the long-term viability of the refinery," said Valero spokesman Bill Day.

As originally proposed, the law would have required Valero to produce gasoline without ethanol to fuel wholesalers in the state who supply retail filling stations.

Valero said the unblended gasoline would have required the Memphis refinery to add between $130 million and $150 million in storage and transfer systems to keep the unblended separate from blended fuels.

"There's no way that refinery could bear that cost," Day said.

Wholesalers have pushed for the bill, which would have required them to blend ethanol with the gasoline and get the tax credit Valero now earns for adding the ethanol.

Valero and wholesalers have been negotiating changes in the proposal, Day said.

Valero and the wholesalers have not disclosed the details of the compromise.

Valero has sought to sell the Memphis refinery because it does not fit the company's preference for plants near major bodies of water over which a wide variety of crude oil grades can be delivered by tanker.

Like all refiners, Valero is contending with reduced demand for motor fuel due to the recession.

Ethanol attracts water and cannot be shipped through pipelines. It is splash blended at terminals and then placed in tanker trucks. (Reporting by Erwin Seba; Editing by Gary Hill)