The settlement comes after a San Francisco jury in April decided against Lyondell, the world's largest producer of MTBE, or methyl tertiary butyl ether, and oil refiners Shell Oil Co. and Tosco Corp. (now part of Phillips Petrolem )

The jury also found that Lyondell and Shell acted maliciously by withholding information about MTBE's hazards.

In 1997, water wells on Lake Tahoe's south shore were found to be contaminated with MTBE, which has an affinity for water. Even small amounts give off turpentine-like odors and opponents charge that MTBE may cause cancer in animals.

"We feel that it is in the best interest of our shareholders to settle at this time, as mistrials, retrials and appeals could create costs larger than this settlement," Lyondell spokesman David Harpole told Reuters.

The water district declined to comment on the award, citing a judge's gag order, as did Shell, which is still involved in the trial.

California Gov. Gray Davis banned MTBE in 1999 after a University of California scientific review panel found it to be an environmental hazard in ground water.

"MTBE has been unfairly maligned. The problems has been leaking underground storage tanks. As they have fixed the problem with the tanks they have seen the contamination from gasoline and MTBE declining," Lyondell's Harpole said.

Exxon Mobil Corp. , the former Atlantic Richfield Co. , and integrated oil company Unocal and local gasoline station owners were also sued for negligence that caused MTBE to leak from underground storage tanks into groundwater. The companies have already settled out of court.

"Numerous test wells have found MTBE from leaking tanks," said California Environmental Protection Agency spokesman William L. Rukeyser. "However, it has been detected in only 54 public drinking water wells (out of 9000 sampled) statewide. All of those wells have been closed, or their water treated."

SETTING PRECEDENT

The South Tahoe case, which is one among dozens suing for MTBE contamination throughout the United States, set a precedent as "the first time that any jury has ruled that gasoline containing MTBE was a defective product," said Washington environmental lawyer Steven Leifer.

With dozens of cases still pending throughout the country, experts estimate that the nation's biggest oil companies may have to pay billions of dollars in clean up costs and punitive damages.

Last week, a federal judge denied class action status to plaintiffs from four states that were suing the major oil companies for polluting groundwater with MTBE.

"In the wake of South Tahoe there are likely to be additional water districts that decide to pursue claims should they experience MTBE contamination," said Leifer, whose firm Baker Botts is representing the petroleum industry in ongoing litigation.