(Releads on spill moving downstream, city cuts off water supply, updates with stock closing price)

By Rod Nickel and Julie Gordon

July 22 (Reuters) - Efforts to contain an oil spill in a major western Canadian river faced a setback on Friday, after water levels rose, allowing the oil to flow past containment booms and downstream toward a small Saskatchewan city, provincial officials said.

The city of North Battleford, which draws its drinking water from the North Saskatchewan River, shut off its supply intake and was preparing to use ground water until the immediate risk had passed, the government of Saskatchewan said in a statement.

Up to 1,572 barrels of heavy oil and diluent leaked from Husky Energy Inc's Saskatchewan Gathering System pipeline on Thursday, flowing into the river. The company shut in the line, stopping the leak.

Husky crews were busy on Friday working to clean up and contain the spill, and both company and government officials were hopeful that booms in the river near the village of Paynton would stop the flow of the oil mixture.

But water levels rose, pushing debris into the booms, and the oil continued to moved downstream, the province said. There were worries it could contaminate drinking water supplies, prompting North Battleford to shut down its water intake plant.

The city of 14,000 has water in its reservoirs and can also rely on treated well water, Mayor Ian Hamilton said, adding he planned to speak with Husky about preventing future spills.

The Calgary-based company, which reported a smaller-than-expected loss on Friday, said it is testing water samples as it monitors the situation. So far, no water advisories have been issued.

Husky chief operating officer Rob Peabody told media on a conference call that it would likely be weeks before the cause of the leak was known.

He added that the company was assessing the business impact of the spill, but did not provide details on shipment impact. The Saskatchewan Gathering System runs from Husky's heavy oil operations east of Lloydminster to facilities in that city.

"This gathering system is flexible," said Peabody. "There's more than one way to get through the pipeline system, so we really are expecting minimal impact to production at this stage."

The province said emergency activities are expected to continue for several days and has said the company will be responsible for the cost of the cleanup.

The North Saskatchewan River is a major tributary to the Saskatchewan River, which flows east across Saskatchewan and Manitoba into Lake Winnipeg.

Husky shares closed up 3.05 percent at C$15.89 on Friday in Toronto. (Reporting by Rod Nickel in Winnipeg and Julie Gordon in Vancouver; Editing by Jeffrey Hodgson, Bernard Orr)

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