Ecuador says to end Repsol oil contract

By Alonso Soto

QUITO, Oct 31 (Reuters) - Ecuador will end its extraction contract with Spain's Repsol after they failed to agree on a new oil deal, the toughest step in the left-wing government's drive to tighten control over the energy sector.

President Rafael Correa has promised more state control over the country's natural resources and wants oil companies to transfer to new service contracts that guarantee the government more oil revenue.

"The government has decided to end its working relationship with Repsol," Oil and Mines Minister Derlis Palacios told reporters in Quito. "We will not allow anyone to make fun of the state."

A Repsol spokeswoman in Madrid said the company still hoped to reach a negotiated solution with Ecuador.

Repsol's shares fell by 25 euro cents to 14.60 euros within minutes of Ecuador's announcement before pulling back after the company's response to close at 14.84 euros.

Correa, a popular former economy minister, has in the past threatened to end deals with foreign companies as a negotiation strategy to secure better terms for the state.

Correa's arm-twisting tactics with foreign companies have kept investors jittery and reduced investment in the key oil sector of the OPEC-member nation.

Talks with the Spanish oil operator collapsed as the two sides were negotiating a transitional contract that would have led to a service deal. Other oil companies, such as Brazil's Petrobras, have agreed to the temporary accords.

Repsol, one of the Andean country's largest investors, extracts around 65,000 barrels of oil per day from is oilfields in Ecuador's Amazon jungle. Its work in Ecuador represents a small part of its operations world-wide.

Service deals would pay companies a fee for extracting petroleum, but allow the government to keep the crude. The state and companies share production under current contracts.