UPDATE 1-Thousands march in Rio over oil dispute, pressuring Rousseff

* Protesters urge Rousseff to veto royalty bill

* Rousseff plans partial veto - source

* Rio says bill would cripple finances, World Cup, Olympics

RIO DE JANEIRO, Brazil, Nov 26 (Reuters) - As many as

200,000 people demonstrated in Rio de Janeiro on Monday to urge

Brazilian President Dilma Rousseff to veto a bill that local

officials say could cost Rio state billions of dollars in lost

oil revenue and cripple plans to host the World Cup and

Olympics.

Late Monday, a person familiar with the president's plans

said Rousseff is indeed planning to veto at least part of the

bill, particularly a portion that redefines royalty payments for

existing oil production in Brazil.

The president, the person added, instead will propose that

Rio and Espirito Santo, the two states with most of Brazil's

existing oil output, continue to get a level of royalties from

current production similar to what they received last year. The

partial veto would not change parts of the bill that redefine

oil royalties from production at new fields.

For Rousseff, the protest raised the stakes on what may be

the most sensitive decision she has faced in her nearly

two-year-old government: How to distribute tens of billions of

dollars in expected revenues from a massive offshore oil find

that Brazil discovered in 2007.

The bill, passed by Congress this month, would spread the

windfall more evenly to Brazil's 26 states and federal district.

As submitted for her approval, however, it would also alter

royalties on existing production, angering Rio and other

southeastern states where most of Brazil's oil is located.

Rousseff has until Friday to veto the bill, but is expected

to decide on the partial veto on Thursday, the person said.

Monday's event by early evening had attracted about 200,000

demonstrators, according to police calculations.

The protest began with a march through Rio's colonial center

and was followed by a series of speeches, concerts, and

impromptu revelry that at times gave it a festive air. In recent

days, state officials plastered streets and buildings with

banners advertising the protest in large black and white

lettering and a command in red for the president: "Veto, Dilma."

Rio is spending tens of billions of dollars to build

stadiums and other infrastructure for soccer's World Cup in 2014

and the 2016 Summer Olympics, two marquee events expected to

attract hundreds of thousands of visitors.

Rio Governor Sergio Cabral, a key ally of the president, led

the protest. He has cast the debate in dire language that

analysts say may exaggerate the actual financial stakes but has

nonetheless intensified political pressure on Rousseff.

"This bill will cause the financial collapse of the state of

Rio de Janeiro," Cabral warned earlier this month. "There would

be no Olympics, no World Cup, no payments for retirees and

pensioners."

Approving the bill could hurt Rousseff's relations with

Cabral's PMDB party, a large and ideologically shape-shifting

group that is a lynchpin of the broad coalition that supports

her ruling Workers' Party.

Rousseff has vowed to further Brazil's efforts to reduce

poverty, in part by redistributing the windfalls from its

growing commodity exports - from oil and iron ore to foodstuffs.

Throughout the day Monday, police had cordoned off large

swaths of Rio's center, along the river-like bay that gives the

city its name. State and municipal officials were facilitating

attendance by waiving subway and ferry fees and providing buses

from far-flung towns outside the capital.

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