Poland's Treasury has reached an agreement with Netherlands-based insurer Eureko BV over insurer PZU, the Treasury minister said Friday, ending an almost decade-long dispute between Poland and the Dutch insurer.

The deal brings to close a battle over control of PZU, known formally as Powszechny Zaklad Ubezpieczen SA. Eureko disputed the government's failure to honor an agreement to complete PZU's privatization, which would have allowed the Dutch company to acquire more shares in PZU.

Eureko claimed that the failure cost it the chance to buy shares at a lower price in the past and to raise PZU's value by taking control of the company.

Poland holds 55.1% of PZU, while Eureko has 32.1%.

Under the terms of the agreement, Eureko will gradually reduce its stake in PZU, and will drop the arbitration case against Poland in exchange for compensation of 4.77 billion zlotys ($1.63 billion), several times less than the more than PLN35 billion demanded by Eureko.

The Treasury and Eureko will sell PZU shares in an initial public offering likely to be held next year.

In addition to compensation, Eureko will also retain the right to accumulated dividend from shares it now owns in PZU, Treasury Minister Aleksander Grad said.

Thursday, PZU shareholders approved the creation of a reserve fund of PLN12 billion zlotys for unlocking cumulated dividends, a move widely interpreted as signaling that a deal with Eureko was imminent. PZU hasn't paid a dividend to shareholders for the past three years.

Grad said that PZU would pay a dividend to shareholders this year, but added that the payment would be "safe for the local markets." This week, the zloty and Polish government bonds came under pressure as investors were concerned that, in order to pay the dividend, large amounts of treasury bonds held by PZU would hit the market, while Eureko would exchange its part of the dividend into euros, and as a result, hurting the zloty.

At 1115 GMT, the zloty was at 4.2450 against the euro, from 4.2800 earlier in the morning. Compensation to Eureko will be paid from the dividend that the Treasury will receive from PZU, as well as proceeds from the sale of 5% of PZU sold in the IPO. Meanwhile, the state budget will receive PLN3.4 billion in dividends from PZU.

Grad said that immediately after signing the agreement, Eureko will transfer 10% of the shares it owns in PZU into a special purpose company, controlled by the Polish Treasury. These shares will subsequently be sold in PZU's IPO. In the next stage, Eureko will sell a further 5% in PZU.

Grad said that investment bank Nomura (NMR), which advised the Treasury on the deal, valued PZU at PLN25.25 billion, excluding the cumulated dividend.

Once the Dutch insurer has reduced its stake in PZU to below 13% and has waited a subsequent three years, it will be able to establish competitive activities in Poland, Grad said.

For the next 16 years, Eureko can't hold a stake in excess of 5% in PZU.

-By Marek Strzelecki, Dow Jones Newswires; +4822 447-2433; marek.strzelecki@dowjones.com