* EPHZHB will immediately unfreeze Aluminij's accounts

* A third of production halted since Oct. 15

* Aluminij seeks government help to restart output

SARAJEVO, Oct 22 (Reuters) - Aluminij Mostar ALUM.SJ , Bosnia's sole aluminium smelter, clinched a deal on Tuesday to settle its debt to state-run power company EPHZHB JPEM.SJ and stave off closure.

Aluminij, a mainstay of Bosnia's economy, began a gradual shutdown of its smelter on Oct. 15 after EPHZHB froze its bank accounts in a dispute over a 40 million Bosnian marka ($27.7 million) debt owed for power supplies. urn:newsml:reuters.com:*:nL6N0I52LJ

Like other smelters, Aluminij Mostar has been squeezed by a 30 percent fall in the price of aluminium in the last 2-1/2 years caused by oversupply and by high power prices.

The smelter said it had agreed with EPHZHB to pay its debt in 10 monthly instalments beginning on February 2014 and to service its monthly obligations towards the utility through the end of this year.

The deal was reached through the mediation of the government of Bosnia's autonomous Muslim-Croat federation, where the smelter is located. Aluminij's bank accounts will be unblocked immediately, it said.

"Today's agreement will practically stop the gradual shutdown and enable further production," Aluminij's General Manager Ivo Bradvica said in a statement.

Aluminij Mostar accounts for more than a quarter of Bosnia's national output. It produces around 160,000 tonnes of aluminium a year and employs 900 people directly in the Mostar area and thousands more indirectly.

Bradvica also said the company expected the government to help it restart a third of its production, which has been halted since last week, as well as to come out with a proposal on plans to subsidise its further output.

The government had already moved in June to save Aluminij Mostar from collapse by taking a 44 percent stake and promising further subsidies.

Small shareholders hold another 44 percent and the Croatian government the remaining 12 percent.

The government of the Muslim-Croat federation also owns 98 percent of the utility EPHZHB.

Since the end of its war in the 1990s, Bosnia has been made up of two autonomous entities - the Muslim-Croat Federation and the Serb Republic - under a weak central government.

(Reporting by Maja Zuvela; editing by Jane Baird)

((maja.zuvela@thomsonreuters.com)(+387 33 295 485)(Reuters Messaging: maja.zuvela.thomsonreuters.com@reuters.net))

Keywords: BOSNIA ALUMINIJ