JAKARTA (REUTERS) - Indonesia has agreed to pay a Japanese consortium S$698 million for their share of Southeast Asia's only aluminium smelter, a government official said on Wednesday, avoiding arbitration that threatened to hurt relations between the two countries.

Japanese shareholders including Sumitomo Chemicals Corp and Mitsubishi Corp handed control of Sumatra-based PT Indonesia Asahan Aluminium (Inalum) to the Indonesian government on November 1 even though they had been unable to end a months-long dispute over the price.

"Good news. Today my small team in Tokyo informed me that an agreement has been reached on a price," Industry Minister M.S. Hidayat told reporters. He said the agreed price was US$556.7 million.

An official at Nippon Asahan, a consortium of 12 Japanese firms that hold 58.88 per cent of Inalum, declined comment.

A source with direct knowledge of the mattter confirmed the agreement on pricing but said the deal had still to be ratified by both sides. However, he said the official signing was expected in a week or two.

The Japanese side had said it would take the case to the International Center for Settlement of Investment Disputes if talks failed.

According to industry sources, some Japanese government officials were worried that a prolonged dispute would hurt relations between Indonesia and Japan, which has billions of dollars of investment in the Southeast Asian country.

Indonesia's takeover of PT Inalum, which produced 246,000 tonnes of aluminium in the year ended March 2012, is part of efforts by the country to earn more revenue from its natural resources and curb foreign ownership.

Inalum is one of only a handful of smelters in Indonesia and is a desirable asset as the country pushes to develop mineral processing facilities.