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By Marianna Parraga

HOUSTON, April 17 (Reuters) - A U.S. court is expected to confirm or reject in coming days a $3.7 billion offer by a Contrarian Funds affiliate aimed at setting a floor for a new bidding round for shares in the parent of Venezuela-owned refiner Citgo Petroleum.

This follows a hearing in which creditors pursuing Citgo, the seventh largest U.S. refiner, made their arguments on Thursday. The company's parent, PDV Holding, is being auctioned to cover up to $21 billion owed by Venezuela and its state oil company PDVSA PDVSA.UL.

The bid by Red Tree Investments, recommended last month by court officer Robert Pincus, who is overseeing the auction, has unleashed a battle among 16 creditors that remain in the eight-year court case aimed at compensating companies and bondholders for debt defaults and expropriations in Venezuela.

Supporters for the bid include miner Crystallex and oil producer Conoco Phillips COP.N, which would get proceeds if Red Tree ultimately wins the auction. However, creditors below them in priority have rejected the offer, saying it is too low and complex.

Delaware judge Leonard Stark filed a document earlier this week saying he was "inclined" to accept Pincus' recommendation due to the offer's certainty of closing.

On Thursday, Stark listened to the creditors, which last year rejected a higher $7.3 billion bid by an affiliate of hedge fund Elliott Investment Management due to payment limitations.

Starting with such a low offer in this bidding round would make it difficult to approach a targeted $7 billion to $8 billion value for Citgo, several creditors and lawyers representing Venezuela said at the hearing.

A sticking point is Red Tree's agreement to pay holders of a bond issued by Citgo's ultimate parent, Caracas-based PDVSA, as part of its 'stalking horse' bid, which sets a baseline price for the auction.

The pact would remove a key obstacle in the auction, since payment to the bondholders would be required to release the collateral on Citgo's equity. However, that would reduce auction proceeds to creditors by up to $3 billion.

Due to its complexity, Red Tree's bid could also make it hard to compare competing offers in the 30 days following the judge's selection of the stalking horse bid, some creditors said.

"The selection of the Red Tree bid will frustrate a viable topping period" for rival bids, one of the lawyers representing miner Gold Reserve GRZ.V said in the hearing.

A consortium that includes a Gold Reserve affiliate, units of U.S. conglomerate Koch and Rusoro Mining RML.V submitted a $7.1 billion bid that Pincus said he did not recommended because the deal's closing was uncertain.

Gold Reserve's lawyers are fighting Pincus' argument. The group proposed creating a company that would borrow money and merge with Citgo Petroleum post-closing.

"The court hopes for robust competition," a counsel for Pincus said, noting that price will be a major factor in the final recommendation for a winning bid.

(Reporting by Marianna Parraga; Editing by Emelia Sithole-Matarise and Richard Chang)

((marianna.parraga@thomsonreuters.com; +1 713 371 7559; Reuters Messaging: @mariannaparraga))