(Corrects paragraph 4 to say that Macy's sued Martha Stewart and J.C. Penney in 2012, not last year)
* Terms of settlement not disclosed
* Macy's says deal does not affect lawsuit against Penney
* Martha Stewart shares rise 8 pct to year-high
By Neha Alawadhi and Aurindom Mukherjee
Jan 2 (Reuters) - Martha Stewart Living Omnimedia Inc said on Thursday it settled a lawsuit with retailer Macy's Inc over a home products deal with J.C. Penney Co Inc.
Martha Stewart did not disclose the terms of the settlement, but said the deal would not be material to the company.
The company's shares rose as much as 8 percent to their year-high of $4.55 on the New York Stock Exchange.
Macy's sued Martha Stewart and Penney in 2012 after the two announced a partnership in 2011 to open Martha Stewart home shops at hundreds of Penney stores.
The settlement frees Martha Stewart to move forward with its deal with Penney, which could be incremental to its business, Noble Financial Capital Markets analyst Michael Kupinski said.
Penney and Martha Stewart revised their agreement in October, eliminating cookware, bedding and bath products, and other merchandise to which Macy's claims exclusive rights under a 2006 deal.
With its broadcast and publishing revenues falling, Martha Stewart has been focusing on boosting its merchandise business.
The company's merchandise revenue grew 7 percent in the quarter ended Sept. 30.
The business accounted for about 42 percent of Martha Stewart's total revenue in the quarter, up from about 30 percent a year earlier.
Macy's sued Martha Stewart for breach of contract and Penney for interfering with its agreement with Martha Stewart. Both lawsuits were combined last year.
Macy's also sought to stop Penney from selling any products designed by home improvement doyenne Martha Stewart even if her name doesn't appear on the items or their marketing.
Macy's said in a separate statement that the Thursday settlement did not affect its outstanding claim against Penney.
Penney shares were down about 4 percent at $8.79 in afternoon trading. Macy's shares were little changed at $53.10. (Reporting by Neha Alawadhi and Aurindom Mukherjee in Bangalore; Editing by Kirti Pandey)