HOUSTON - Enron Corp. said yesterday that it has settled a dispute over notes issued by a partnership created in 1998 to refinance part of the purchase price of the top asset in an ill-fated water venture.

The settlement would give note holders $127.5 million and reduce a $1.1 billion bankruptcy claim - among the largest in Enron's Chapter 11 case - to $507.5 million.

"We are pleased to have reached a settlement, which will help avoid lengthy and costly litigation," said restructuring expert Stephen Cooper, Enron's interim chief executive.

The deal is awaiting approval from U.S. Bankruptcy Judge Arthur Gonzalez in New York.

The partnership at the center of the deal, Marlin Water Trust, isn't among those once run by former Enron finance chief Andrew S. Fastow and credited with helping bring about the energy company's failure.

But it helped finance the $2.2 billion acquisition of Britain's Wessex Water PLC in 1998, once the cornerstone of Azurix, a water subsidiary launched by Houston-based Enron with the intent of competing with the world's biggest water companies and making millions trading in water. Azurix, run by former Enron executive Rebecca Mark-Jusbasche, went public in 1999. The company quickly tumbled after failing to realize that water couldn't be transported and traded like natural gas because of the lack of infrastructure and complexity of laws surrounding its movement.

Mark-Jusbasche resigned in 2000 and Enron eventually wrote down its investment in Azurix and other money-losing ventures. Those losses were announced in mid-October 2001, when Enron began sliding into bankruptcy.

When Enron's credit was downgraded to junk in late November 2001, the company was obliged to immediately pay more than $900 million owed by Marlin Water Trust. Enron didn't have the money, and sought bankruptcy protection Dec. 2, 2001. With interest, the claim rose to $1.1 billion.

The $127.5 million to be paid to note holders for the trust is collateral that the Bank of New York, which represents the note holders, said shouldn't be lumped into money owed to all creditors.

In exchange, note holders agreed to cut their $1.1 billion claim to $507.5 million. As creditors of Enron, they will receive an estimated 14.4 cents to 18.3 cents on the dollar of that $507.5 million if Enron's proposed reorganization plan is approved, as expected.