UPDATE 3-Lessor AerCap agrees settlement over Aeroflot jets stranded in Russia

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Breakthrough in standoff with Russia over 400 Western jets

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AerCap says Russian insurer pays $645 million over 17 jets

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Shares in AerCap up 5% in premarket trade

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AerCap says U.S. approved deal, consistent with sanctions

(Adds AerCap shares up 5% in paragraph 3; Aeroflot statement in paragraphs 4-5; details on EU sanctions law in paragraph 6)

By Conor Humphries

DUBLIN, Sept 6 (Reuters) - The world's largest aircraft lessor has agreed to settle an insurance claim over Russia's refusal to return 17 jets leased to airline Aeroflot, a landmark agreement in a dispute over 400 Western planes stranded in the wake of the Ukraine invasion.

Ireland-based AerCap in a stock market filing said it had received $645 million from insurance company NSK in full settlement of insurance claims in relation to 17 aircraft and five spare engines leased to state-controlled airline Aeroflot and its subsidiary Rossiya.

The planes would now become the property of Russian state-owned NSK.

"We have released our claims against NSK, Aeroflot, Rossiya and their international reinsurers with respect to these aircraft and engines," said AerCap, whose shares rose around 5% in premarket trading.

Before last year's invasion of Ukraine, Russia was a major market for aircraft lessors, which bought jets from Boeing and Airbus and leased them to Russian airlines.

The invasion triggered Western sanctions that forced lessors to cancel hundreds of leases. Moscow then refused to allow the planes to leave.

Aeroflot said in a statement that ownership of 18 aircraft and five engines had transferred to NSK following settlement with AerCap. It was not immediately clear why the number of aircraft differed from AerCap's statement by one.

"AerCap has terminated its claims against Russian parties both under insurance policies issued by Russian insurance companies and under leasing agreements," Aeroflot said, adding that it is in talks with other lessors about settling claims.

AerCap said it had secured permission from the U.S. Treasury and Commerce departments to complete the deal, which it said was "consistent with other applicable sanctions regimes."

EU sanctions do not prohibit such insurance settlements with Russian entities, depending on the details of the deal, lawyers say.

The deal, an apparent compromise in an economic war between Moscow and the West, looks set to lower a bill facing insurers, who are locked in court cases over who should pay for the loss of up to $10 billion.

AerCap filed a $3.5 billion London lawsuit last year against AIG and Lloyd's over 141 aircraft and 29 aircraft engines it owned that were on lease to Russian airlines. A number of smaller lessors also have jets stuck in Russia, including SMBC Aviation Capital, which had 34.

AerCap said the amount of its claim against its all-risks insurers under "our contingent and possessed insurance policy" has been reduced to approximately $2.75 billion following the Aeroflot settlement.

It was not immediately clear whether such settlements could also allow Russian airlines to secure more formal ownership of planes at potentially steep discounts.

AerCap said settlement discussions were ongoing with respect to claims under the insurance policies of several other Russian airlines.

Reuters reported last year that Russian airlines had held exploratory talks with at least one major Western leasing firm about using state funds to buy some of the stranded jets.

AerCap in March said it had been approached by Russian airlines and their insurance companies about possible settlements for the stranded planes. (Writing by Conor Humphries; Additional reporting by Gleb Stolyarov and Kirstin Ridley; Editing by Jason Neely, David Evans, Peter Graff)