UPDATE 1-Petrobras to return Amazon oilfield to Ecuador

(Adds Petrobras response in paragraph 7)

QUITO, Sept 20 (Reuters) - Brazilian oil company Petrobras PETR4.SA has agreed to give back to Ecuador a controversial oilfield in the heart of the Amazon jungle, President Rafael Correa said on Saturday.

Correa, a leftist former economy minister and ally of Brazilian President Luiz Inacio Lula da Silva, last year gave Petrobras permission to exploit Block 31, located in Yasuni national park.

But the project is on hold because the company has clashed with Ecuador over taxes, and environmentalists have fiercely opposed any oil activity inside the park that is home to rare tropical species of jaguars and pink dolphins.

“Even after they (Petrobras) invested $200 million we were able to get them to transfer Block 31 to (state oil firm) Petroecuador,” Correa said during his weekly radio show.

He did not say if the oilfield would be exploited by the state or tendered to other foreign companies.

Petrobras planned to invest more than $300 million to develop the oilfield and expected to extract 40,000 barrels of oil per day. Block 31 is considered a key project for OPEC member Ecuador to lift dwindling oil output.

The company said in a statement that it has agreed to terminate its contract for the oilfield, but plans to continue investing in the country.

Government officials say the agreement to return the field is part of a broader deal now being negotiated that would allow Petrobras to switch to a service contract.

Under such an agreement, the state would keep all the oil the company extracts in exchange for a fee.

Oil Ministry official Jose Sanchez, who participated in negotiations, told Reuters the company wanted to return the oilfield because it was unprofitable under new contractual terms sought by the government.

Petrobras is one of the country’s largest investors and produces around 35,000 barrels per day from its Amazon oilfields in Ecuador.

Correa, who has pushed foreign oil companies to rework their deals in an effort to boost state control over the sector, faces a tough referendum next week to bolster his powers over South America’s No 5 oil producer. (Additional reporting by Alexandra Valencia) (Reporting by Alonso Soto; Editing by Xavier Briand)