By Jeb Blount

RIO DE JANEIRO (Reuters) - A Brazilian federal judge on Tuesday dismissed a lawsuit against No. 2 U.S. oil company Chevron Corp after approving a negotiated settlement, a decision that closes a nearly two-year legal battle over an oil spill in November 2011.

Brazilian prosecutors sought 40 billion reais ($18 billion) in damages from Chevron and offshore drilling contractor Transocean Ltd for a 3,600-barrel leak in the Frade offshore oil field Chevron operates northeast of Rio de Janeiro.

Prosecutors also filed criminal charges against the companies and 17 of their employees. A judge rejected those charges, but prosecutors are appealing.

The dismissal came after Judge Raffaele Felice Pirro of the federal court in Rio de Janeiro accepted an "adjustment of conduct" deal with Chevron that commits the company to spending about 300 million reais ($135 million) in compensatory activities. Chevron and the government agencies that signed the accord said Transocean had no responsibility for the spill.

The case, the largest-ever environmental lawsuit in Brazilian history, raised questions about the cost of doing business in the nation's high-risk oil business and the ability of prosecutors to assess proper penalties.

While the spill caused no discernible environmental damage, was dispersed within days, never came within 100 kilometers (62 miles) of shore and resulted in no injuries, Chevron and its partners had to stop producing for about a year and a half. Brazilian petroleum regulator ANP fined Chevron for failing to follow drilling plans, but absolved the company of negligence.

The damages sought were many times larger than those U.S. courts awarded plaintiffs against operator BP Plc in the much larger 2010 Deepwater Horizon spill, which fouled beaches, damaged fisheries and killed 11 people in the Gulf of Mexico.

Chevron owns 52 percent of Frade and is the field operator. Brazil's state-run oil company Petroleo Brasileiro SA owns 30 percent and Frade Japão, a joint venture between Japanese trading companies Sojitz Corp and Inpex Corp, owns 18 percent. Petrobras, Sojitz and Inpex were never named in the civil or criminal lawsuits.

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Both Chevron and Transocean welcomed the decision in short statements from their press offices. Chevron added that 95.2 million reais, or about a third of the initial settlement value, will be spent on social and environmental programs approved by prosecutors, the ANP and environmental protection agency Ibama.

Chevron will still have expenses for additional safety equipment such as service boats in the Frade field. It will need to monitor and trap small oil seepages from the sea-floor, some of which might have nothing to do with the initial spill.

Frade produced 12,645 barrels of oil and equivalent natural gas per day in August, 36 percent less than in July, and less than a fifth of 72,000 boepd at its peak just before the spill, the ANP said in its monthly report on Tuesday. Chevron's average August share was 8,921 boepd.

Chevron shares fell 0.15 percent to close at $121.32 on the New York Stock Exchange, its lowest since September 6. Transocean rose 1.08 percent to $44.98, the stock's biggest one-day gain in three weeks.

($1 = 2.22 Brazilian reais)

(Reporting by Jeb Blount; Editing by Gerald E. McCormick, Lisa Von Ahn and Andre Grenon)