HOUSTON, May 29 (Reuters) - LNG developer Tellurian will use most of the proceeds from the sale of its natural gas assets to Aethon Energy to pay off long-term debt, a company spokesperson said on Wednesday.

Closely held Aethon Energy, one of the largest gas producers in the Haynesville shale region, on Wednesday agreed to buy Tellurian's upstream assets for $260 million. The price was below analysts' projections of $270 million to $500 million.

Aethon signed a preliminary deal to purchase 2 million tons per annum of liquefied natural gas (LNG) from Tellurian's Driftwood LNG plant when the proposed project's first phase is completed.

The sale "puts us in a better financial position and will encourage other LNG buyers to step up," the company spokesperson said. The deal is expected to close this quarter.

Tellurian shares on Wednesday fell nearly 12% to under 50 cents apiece in afternoon trading following the announcement.

Tellurian has struggled to sign customers and recruit investors for the up to 27.6 million metric ton per annum plant in Lake Charles, Louisiana. It has financed construction to date from stock sales and production from its Haynesville assets.

Proceeds from the Aethon deal will go toward paying off debt that totaled about $224 million at the end of March, the Tellurian spokesperson told Reuters. The remaining $36 million can be used for general corporate purposes, including the construction of Driftwood LNG.

Tellurian spent $7 million on Driftwood's construction in the first quarter, compared with $58 million in the same period a year ago, according to its U.S. Securities and Exchange Commission filings.

The company's long-term liabilities were about $461 million at the end of March, according to its latest financial report. (Reporting by Curtis Williams in Houston; Editing by Leslie Adler)