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UPDATE 2-Mexican government, Grupo Mexico agree deal over railway dispute

(Adds details on deal from interior minister in paragraph 4)

MEXICO CITY, June 1 (Reuters) - Mexico's president said on Thursday officials had signed a deal with Grupo Mexico to compensate the conglomerate for the state taking over a section of railway it operates in southern Mexico, lifting the firm's shares by more than 4%.

The government last month occupied the 120 kilometer (75 mile) section of track in Veracruz state due to its importance to the president's plan to create a business corridor connecting the Pacific Ocean with the Gulf coast across a southern isthmus.

As part of the accord signed on Wednesday, Grupo Mexico's concession in the area has been extended eight years, President Andres Manuel Lopez Obrador told a government press conference.

Interior Minister Adan Augusto Lopez, speaking alongside Lopez Obrador, said the length of the extension was calculated on the basis of what originally had been paid for the concession, after factoring in inflation.

Grupo Mexico shares were up 4.69% in early-afternoon trading, after rising as high as 4.83%.

Lopez Obrador also said a Grupo Mexico unit had withdrawn a complaint against his rail project in the Yucatan peninsula known as the Mayan Train. The two multi-billion dollar ventures aim to lift economic development in the country's poorer south.

Grupo Mexico is controlled by Mexican tycoon German Larrea. After the track's occupation, it emerged Grupo Mexico was out of the running to buy the Mexico unit of U.S. bank Citigroup, which said it would instead pursue an initial public offering. ($1 = 17.7767 Mexican pesos) (Reporting by Isabel Woodford and Stefanie Eschenbacher; Editing by Marguerita Choy and Richard Chang)