* Shares down 4 percent after DoJ filing
* Deal window closing as U.S. election, court date loom
* Tens of billions of dollars ride on outcome
* Analyst revives BP break-up suggestion
By Sarah Young and Sinead Cruise
LONDON, Sept 5 (Reuters) - Hopes BP can settle early out of court on liability for its 2010 U.S. Gulf oil spill looked forlorn on Wednesday after U.S. prosecutors laid out a legal case for gross negligence on which tens of billions of dollars hang.
In the two years that have passed since the spewing Macondo deepwater well was capped, the Department of Justice (DoJ) has made it clear BP may have a gross negligence case to answer - implying a potential $21 billion fine on top of other payments, some already made, others yet to be determined.
The British oil company has been vehement in denying such liability for the United States' worst offshore environmental disaster, which killed 11 people and poured crude into the sea for months. It repeated that position after the DoJ filing on Tuesday.
Nevertheless, the parties have been in talks about a multi-billion dollar settlement that could cover outstanding liabilities, and two months ago the Financial Times raised expectations there was a deal in the air by reporting that BP was hoping to pay $15 billion to put the case behind it, while the DoJ was holding out for $25 billion.
The window of opportunity for a deal before the November presidential election and ahead of a trial scheduled to start in January has narrowed since then, and now investors see the weight of uncertainty on the British oil company's share price sticking around for a long time to come.
"The market was hoping that some sort agreement would be reached, either before the presidential elections or ahead of the trial," said Ivor Pether, a fund manager at Royal London Asset Management.
"We don't know when or whether they will reach agreement, but the aggressive language in today's DOJ statement might well reduce the chances of a swift settlement."
BP shares were down 4 percent on Wednesday morning at 419 pence after 39 pages of DoJ court papers homed in on a key well pressure test, saying the way it had been "so stunningly, blindingly botched in so many ways, by so many people, demonstrates gross negligence".
Uncertainty over whether BP can continue to operate in Russia, and whether it can even exit its business there at a decent price, have combined with the oil spill wrangle to put BP's share valuation based on earnings at a discount to the sector in Europe, even though it is the second largest next to Royal Dutch/Shell.
"While these (DoJ) accusations are not entirely new or surprising, they appear to be a firming of the DoJ language," said Credit Suisse analyst Kim Fustier in a note.
"This suggests to us that a settlement acceptable to BP is not imminent, and lowers BP's chances of settling in the low end of the $15-25 billion range. Hence, if it cannot get to a satisfactory agreement we think it might be best for BP to continue to litigate, which would maintain the Macondo overhang for longer than we'd hoped... We believe a settlement or $20 billion or less would be a positive."
Pressure for closure on the spill and in Russia is something chief executive Bob Dudley has become used to since he took over from Tony Hayward in the aftermath of the spill.
And on Wednesday, one analyst revived suggestions that the company should be broken up to release underlying value on the business.
"We re-iterate that the best outcome for long suffering BP shareholders, and indeed the only credible route to unlock our increased SoTP (sum-of-the-parts) value of 732 pence, is a demerger of remaining assets starting with the U.S.," said Investec analyst Stuart Joyner in a note.
That valuation is more than 68 percent higher than BP's current share price based on Tuesday's closing price of 437 pence, and suggests there could be $90 billion of hidden value in a stock valued at around $132 billion. Other analysts' calculations based on pre-Macondo comparisons with rival Shell have put total lost value at between $60 and $70 billion.
"BP died when it failed to cap the Macondo spill in the first few days," said Joyner. "The CEO did a good job of saving BP from forced liquidation, but we do not believe he can revert to its pre-Macondo strategy."