DUBAI  - United Arab Emirates energy producer Dana Gas is close to reaching agreement on restructuring $700 million in Islamic bonds, potentially ending a complex and protracted legal battle with its creditors, sources familiar with the matter said.

Dana Gas last year halted payments on its sukuk, saying the bonds had become unlawful because of changes in Islamic finance. Holders of the sukuk contest its position and are demanding to be paid back.

While legal proceedings are continuing in British and United Arab Emirates courts, talks to find an out-of-court settlement have so far failed to find a resolution.

But the company and a committee of creditors are now very close to an agreement, the sources said.

Both a Dana Gas spokesperson and a spokesperson for the creditors' committee declined to comment.

The proposed restructuring terms would see Dana pay 20 percent of the bonds and roll the rest of the security amount into three-year bonds with a 4 percent profit rate.

The new bonds would have no convertible option, which was a feature of part of the contested $700 million sukuk.

The new terms are still being discussed and no agreement has been signed, said one of the sources close to the matter, adding the parties could still walk away from the potential deal.

In a previous proposal, Dana offered to redeem 10 percent of the sukuk in cash and to roll over the remaining 90 percent over four years at an annual profit rate of 4 percent. It also offered to buy back up to half of the bonds at a 15 percent discount, sources told Reuters in February. 

That proposal was rejected by the creditors' committee, advised by investment bank Moelis.

(Reporting by Davide Barbuscia; Editing by Mark Potter) ((Davide.Barbuscia@thomsonreuters.com; +971522604297; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))