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* Deal reached on lock gate delivery, time of tests -source
* New financing and role of Zurich still up in air - source
* Project could be delayed even if agreement reached - PCA
By Lomi Kriel and Sonya Dowsett
PANAMA/MADRID, Feb 12 (Reuters) - The Panama Canal Authority said on Wednesday it had reached an initial agreement to resolve a weeks-long dispute over cost overruns on a project to widen the 100-year-old waterway that connects the Atlantic and Pacific oceans.
The builders, led by Spain's Sacyr, have stopped work on doubling the canal's capacity while a row rages over $1.6 billion in cost overruns and extra financing for the work that is 70 percent done and due to be finished next year.
Delays could cost Panama millions in lost shipping tolls. For Sacyr - whose partners are Italy's Salini Impregilo , a Belgian and a Panamanian company - the project brings in a quarter of international revenue.
"We have preliminary agreements, there are still some issues to resolve and we are working in that direction," the head of the Panama Canal Authority (PCA), Jorge Quijano, said.
He said that did not mean the PCA had abandoned the alternative of handing over the contract to a third party and did not give details about what any agreement would involve.
A spokesman for Sacyr declined to comment.
A source familiar with the situation said no agreement had been signed but a deal could be sealed soon.
An agreement was likely to centre on both sides bearing some of the additional costs and involve more bank loans, a second source with knowledge of talks said.
Shares in Sacyr traded 6.1 percent higher while Salini Impregilo, which has a 48 percent stake in the consortium (GUPC), traded up 3.1 percent.
Aside from the cost dispute, the two sides are negotiating over a deadline for the consortium returning $785 million in advance payments made by the PCA and the delivery date for 12 of 16 lock-gates, a major part of the project.
Another sticking point is the role of insurer Zurich North America which may convert a $400 million completion bond into backing for another loan.
Agreement on a date for delivering the lock gates was near, a third source with knowledge of the matter said, but issues around financing and Zurich's role were yet to be resolved.
The Italian company was on board with the PCA, the source said without specifying on which aspects of the dispute.
The PCA and the GUPC were also in agreement regarding the date of tests of the new structures and a payment plan for suppliers and subcontrators, this source said.
The consortium has said it is willing to let third party arbitrators decide who pays for overruns but has also said it needs $1.6 billion to finish the work.
"We are not afraid of finishing the project ourselves, we know that we can do it and we have the technical confidence and the economy capacity," PCA head Quijano told journalists on Wednesday, Spanish news agency EFE reported.
"But that also means bigger delays than if GUPC finished the job."
Quijano said the project was likely to suffer delays even if it reached an agreement with the consortium, but could be finished by December 2015.
Talks over how to find the additional cash to finish the project have been extended twice. Panama called off talks last week but started them again soon afterwards.