Brazil prosecutor seeks probe of Petrobras offer

* Petrobras oil-for-shares plan may face legal challenge

* Inquiry could delay plans for massive share offering

(Adds comments from government watchdog, updates share price)

By Raymond Colitt and Brian Ellsworth

BRASILIA/RIO DE JANEIRO (Reuters) - A federal prosecutor said he has launched a probe to determine if state oil company Petrobras' oil-for-shares capital plan could harm public coffers, renewing doubts over the company's proposed share offering.

Any delay would deal a heavy blow to Petrobras, which is depending on the plan to raise as much as $25 billion in fresh capital for its crusade to pump billions of barrels of oil from deep beneath the ocean's surface.

The company previously postponed the transaction by two months from its targeted July launch because of delays in the valuation of the crude reserves to be used. This pushed down Petrobras' stock, which was already depressed by uncertainty over the operation.

Brasilia-based public prosecutor Paulo Roberto Carvalho has launched an inquiry, his office said on Thursday. He has also asked the government corruption watchdog, the TCU, to look into whether the state would be harmed if Petrobras swapped its shares for oil reserves at a price of $5 to $8 per barrel.

A TCU ruling could create legal obstacles to the transaction, while the probe could slow the process by spurring public controversy over the valuation of the oil barrels.

Markets believe the fair value for those reserves is $5 to $6 per barrel, while the government's energy regulators believe the price should be $7 to $8.

"The signing of a contract to transfer five billion barrels, under the terms proposed, could imply billions in losses to the Brazilian state," Carvalho wrote in his request to the TCU.

The TCU is studying the prosecutor's request, a spokeswoman for the watchdog said.

In the capitalization, the government will trade up to 5 billion barrels of oil reserves for Petrobras shares.

Another delay in the operation could weaken Petrobras' capacity to finance the world's most ambitious oil exploration and production program, which has become a cornerstone of Brazil's crusade to enter the ranks of developed nations.

With October presidential elections approaching, analysts see the capitalization plan politicized as nationalist sentiment pushes some government officials to seek a higher price per barrel in the swap.

Swiss bank UBS Wednesday downgraded Petrobras' common shares to "sell," citing concerns about the pricing of the barrels for the transaction and the possibility for another delay.

"We continue to expect a September 2010 capitalization, but now with a 60 percent likelihood -- this used to be 75 percent some six weeks ago," wrote UBS analyst Lilyanna Yang, who maintained a "neutral" rating on preferred shares .

"The risks of a delay have indeed increased," she wrote.

The September timeline may be ambitious because Petrobras and the state will have to negotiate the value to be used in the transaction based on two different independent auditors, she said.

Petrobras preferred shares, the company's most commonly traded stock, were up 0.65 percent to 27.68 reais in morning trading on the Sao Paulo stock exchange, compared to a 0.03 percent slump for the benchmark Bovespa stock index.

Petrobras preferred shares have fallen nearly 20 percent this year, while the Bovespa stock index is down around 4 percent. (Reporting by Raymond Colitt in Brasilia and Brian Ellsworth in Rio de Janeiro; writing by Brian Ellsworth; editing by John Wallace)