Kuwait is in unofficial talks with Dow Chemical Company to avoid paying a $2.5 billion penalty for scrapping a $17.4 billion petrochemical deal, a Kuwaiti newspaper said.

'There are friendly unofficial negotiations with Dow Chemical to settle the $2.5 billion penalty before reaching arbitration,' daily newspaper al-Rai said on Wednesday, citing oil sources.

Kuwait has offered to pay about $250 million, or 10 percent of the penalty, the paper said.

The world's fourth-largest oil exporter scrapped the petrochemicals deal with Dow in December 2008, a month after signing it, due to criticism in parliament.-Reuters