UPDATE 4-Kazakhstan law lets government break oil contracts

(Recasts with Nazarbayev-Prodi meeting, analyst comment)

By Raushan Nurshayeva

ASTANA, Sept 26 (Reuters) - Kazakhstan passed a law on Wednesday allowing the government to break contracts with foreign companies, alarming investors and raising the stakes in its row with an Italian-led group developing a huge oilfield.

Stepping up diplomacy over the Kashagan field, Kazakh President Nursultan Nazarbayev met Italian Prime Minister Romano Prodi for closed-door talks in New York on the project's future.

Hours after that meeting, Kazakhstan's lower house of parliament voted unanimously to let the government break contracts if it saw a threat to the country's national security.

The vote gave the government extra leverage over Italy's Eni (ENI.MI: Quote, Profile, Research) and its main partners Royal Dutch Shell (RDSa.L: Quote, Profile, Research), Exxon Mobil Corp (XOM.N: Quote, Profile, Research) and ConocoPhillips (COP.N: Quote, Profile, Research), as talks entered their final stage ahead of an Oct. 22 deadline.

Last month Kazakhstan suspended work at Kashagan in a dispute over spiralling costs and delays. Industry insiders say Kazakhstan expects tens of billions of dollars in compensation.

Kazakhstan's new-found assertiveness in the oil sector echoes Russia's row with Shell, which ended with the firm losing control of the giant Sakhalin-2 energy project, the world's largest liquefied natural gas development.

"There's no way you can describe this legislation as positive from an investment perspective," said one Western investor closely watching the case, who asked not to be named.