The authority said it had agreed to continue talks until February 4 with the consortium, which had threatened to stop work on the project unless the canal foots the bill for $1.6 billion in unforeseen additional costs.

Earlier this month, the consortium, which is led by Spanish builder Sacyr (>> Sacyr SA), announced it could stop work by January 20. But it later said it would not call a halt on the project before at least the end of January.

"The parties agreed to continue meeting over the weekend to further evaluate the options aimed at reaching an agreement," the Canal Authority said in a statement.

Italy and Spain are both committed to finding a rapid solution to the dispute, Italian Prime Minister Enrico Letta and his Spanish counterpart Mariano Rajoy said on Monday.

The consortium also includes Italian builder Salini Impregilo (>> Salini Impregilo SpA), Belgium's Jan De Nul and Panama's Constructora Urbana.

Halting construction on the expansion would be a setback for companies eager to move larger ships through the century-old waterway, such as liquefied natural gas (LNG) producers who want to ship exports from the U.S. Gulf coast to Asian markets.

The canal and the consortium have traded proposals and counter-proposals to find ways to raise financing to keep work going while they deal with the cost overruns via arbitration.

The project was originally expected to cost about $5.25 billion, but the overruns could raise the cost to near $7 billion.

Work began on the expansion in 2007. The project, which is some 72 percent complete, will create a new lane of traffic along the canal and double its capacity.

(Editing by Simon Gardner and Meredith Mazzilli)

By Lomi Kriel

Stocks treated in this article : Sacyr SA, Salini Impregilo SpA