* Puerto Rico says federal offset caused delayed bond payment
* Island officials say bond reserve fully funded
May 30 (Reuters) - The U.S. will resume paying suspended federal transport money to Puerto Rico after the Caribbean island was obliged in March to tap a reserve fund to pay interest on bonds backed by the federal money, officials in Puerto Rico said.
Puerto Rico, whose wobbly finances worry America's $3.7 trillion municipal bond market, said the shortfall in the reserve fund backing $140 million of grant anticipation revenue vehicles, or GARVEES, had been quickly made whole.
But the withholding adds to investor worries about the $13 billion of GARVEE debt issued by some state governments and Puerto Rico.
Critics of GARVEEs, which are based on expected payments from federal gasoline taxes, say the bonds are vulnerable to declines in gasoline tax revenues and win only short-term authorization from Washington lawmakers.
Moody's Investors Service said on Wednesday the action by the federal government, which delayed a $2.1 million interest payment by two days in March, may cause a downgrade of its A2 rating on $86.1 million worth of Puerto Rico Highways Authority GARVEE bonds.
Puerto Rico finance officials late on Wednesday said they do not expect the federal government to repeat the withholding while it is in talks about funds owed to the U.S. Army Corp of Engineers (USACE).
"The USACE informed the Commonwealth on May 16, 2013, that it had decided to take the Commonwealth off the (Treasury Offset Program) pending the negotiation of the final debt agreement with the Commonwealth," Puerto Rico's Government Development Bank said in a written statement.
Treasury and Puerto Rico officials are bargaining over a new repayment schedule for Army Corps work on the Cerrillos Dam and Reservoir and the Portugues-River and Bucana-River projects, the GDB said. No target date for a deal was given.
Officials at Treasury and the Army Corps were not immediately available to comment. Finance officials in San Juan were also unavailable to say when the next federal payments were scheduled.
Puerto Rico finance officials said they had been surprised by the withholding of grant money in March but that the reserve fund had been replenished with $231.2 million of excess investment earnings from a construction fund.
"As of today, the Debt Service Fund continues to be fully funded at the amount required by the GARVEE resolution," the GDB said.
As of May 15, the Treasury had withheld about $158 million in federal payments to Puerto Rico and its agencies in connection with the Army Corps projects and expects that money to be credited against the debts connected to the projects, the GDB said.
Moody's, which last December reduced Puerto Rico's general obligation debt rating to near-junk bond status, said it expected to conclude its review of the highway authority debt within 90 days.