UPDATE 1-Australia's Woodside sells Otway stake for $640 mln

* Woodside sells Otway stake to Origin for $640 mln

* Sale to help fund Woodside's LNG expansion plans

* Origin says to fund purchase from balance sheet (Adds details, background)

PERTH, Nov 2 (Reuters) - Woodside Petroleum Ltd (WPL.AX) will sell its stake in an Australian gas project to partner Origin Energy Ltd (ORG.AX) for A$712.5 million ($639.6 million), as it looks to free up cash to finance other expansion plans.

Woodside, Australia's second-largest oil and gas producer, said on Monday it will its 51.55 percent stake in the Otway project, located off the southeastern state of Victoria, which produces gas for the domestic market.

The deal will boost Woodside's coffers as it seeks to divest non-core assets to finance its bigger and more lucrative liquefied natural gas (LNG) projects, and will also give Origin greater access to the exploration upside of the area and boost its income.

Origin said the transaction will be earnings accretive from the first full financial year following completion. The acquisition will be funded from its balance sheet, which at Sept. 30 included A$4.4 billion of cash reserves and undrawn bank facilities.

"Increasing our interest in the project provides additional earnings from natural gas sold under existing long term contracts to TRUenergy as well as from LPG and condensate sold from the liquids-rich gas stream," Origin Managing Director Grant King said in a statement.

The sale includes production licences for the Thylacine and Geographe fields and adjacent exploration permits, as well as offshore production facilities, pipelines and an onshore gas processing plant, Origin said in a separate statement.

Shares in Woodside fell 1.95 percent to A$46.77 by 2336 GMT, while Origin was down 1.37 percent at A$15.85, against a 2.4 percent fall in the broader stock index .AXJO.

The A$1.1 billion Otway project, which began production in September 2007, is expected to produce 950 billion cubic feet of raw gas, 12.2 million barrels of condensate and 1.7 million tonnes of liquid petroleum gas.

Woodside said the effective date of the transaction is July 1, 2009 with the transfer of ownership anticipated to occur in December 2009.

Other partners in the project include Benaris International Pty Ltd and CalEnergy Gas Australia. ($1=1.114 Australian Dollar) (Reporting by Fayen Wong)