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WRAPUP 2-US official says BP spill fines should go to Gulf

* Navy secretary drew up Obama’s Gulf Coast recovery plan

* Mabus does not specify how much money would be involved

* US Justice Department denies settlement talks with BP (Adds commission, Transocean comments, paragraphs 12-15)

NEW ORLEANS, Sept 28 (Reuters) - A large portion of fines that BP Plc BP.NBP.L may pay for its role in the worst oil spill in U.S. history should go toward fixing the damage caused to Gulf Coast states, a federal official said on Tuesday.

Navy Secretary Ray Mabus, who drew up a Gulf Coast recovery plan at the direction of President Barack Obama, said Congress should dedicate “a significant amount” of penalties levied on BP under the Clean Water Act to restoring a region that suffered economic and environmental damage from the spill.

Mabus did not make clear what proportion of the BP fines should be dedicated to the recovery effort and how much money it would involve. BP faces potentially billions of dollars in fines from the spill, which began in April and was plugged in July.

Meanwhile, a U.S. Department of Justice official denied that it was in settlement talks with the British energy giant after a U.S. congressman told reporters the two parties were in negotiations over spill fines. [ID:nWEN0454]

Republican U.S. Representative Steve Scalise had told reporters in New Orleans that he understood that negotiations were ongoing between BP and the Justice Department that could lead to a settlement or, if they failed, to a protracted court case.

In a report, Mabus also recommended that Congress create a federal Gulf Coast Recovery Council to oversee the funds that would be set aside for Gulf Coast recovery.

Funds should go toward repairing damage to water and wetlands, to economic recovery, to tourism and seafood marketing and promotion, and to improving the health and mental health of people affected by the disaster, Mabus said.

“Congress has to come up with a number,” he said.

Environmental groups praised the recommendations made by Mabus, a former governor of Mississippi, one of the states affected by the spill.

“Secretary Mabus is doing his part to fulfill President Obama’s promise to create a long-term plan to restore the Gulf Coast and make it better than it was before the BP oil disaster,” said a joint statement from groups including the Environmental Defense Fund, the National Audubon Society and the National Wildlife Federation.

The latest government estimate on how much oil spilled from the ruptured well off the Louisiana coast in the Gulf of Mexico is more than 4 million barrels. That could mean a fine of more than $17 billion if the government seeks the maximum penalty against BP.

In another development, the seven-member White House commission that is developing recommendations on the future of offshore energy drilling accused companies involved in the spill of failing to cooperate fully with its inquiry.

The panel lacks subpoena power to force companies such as BP and Transocean Ltd RIG.N to provide information.

A Transocean spokesman said the company “has been and will continue to be responsive to the Commission and other federal entities investigating the Macondo well incident.”

The U.S. House of Representatives passed legislation giving the commission subpoena authority but the measure has languished in the partisan gridlock of the U.S. Senate.

Additional reporting by Ayesha Rascoe and Jeremy Pelofsky in Washington and Erwin Seba in Houston; editing by Anna Driver and Will Dunham