(Corrects second paragraph to read verdict could be reduced by four years instead of to four years)

JOHANNESBURG, Nov 6 (Reuters) - The World Bank on Monday suspended contracts to a German company found guilty of paying bribes in the multi-billion dollar Lesotho Highlands Water project.

Lahmeyer International, a privately-held engineering firm, is barred from receiving World Bank funds for up to seven years, but could see that verdict reduced by four years if it shows greater transparency and proves its corporate behaviour has changed, the Bank said in a statement released in Johannesburg.

Lahmeyer was fined $10 million rand ($1.63 million) in 2003 after being found guilty of bribing Masupha Sole, former head of the Lesotho Highlands Development Authority, a major public works project in the small southern African kingdom.

Lesotho courts charged three other companies with paying bribes to win lucrative deals in the project, including Impregilo, an Italian construction company, Canadian firm Acres International, and French engineering firm Spie Batignolles. Impregilo lost an appeal earlier this year.

Sole was convicted in 2002 and sentenced to 15 years in jail. Construction is under way on the $8 billion scheme to builds dams in Lesotho to supply water to Gauteng, the thirsty industrial centre of South Africa.

World Bank President Paul Wolfowitz applauded the government of Lesotho, a tiny impoverished nation surrounded by South Africa, for standing up to powerful companies on graft.

"Institutions like the World Bank, and the governments of rich countries, should support the bold stance of poor countries like Lesotho which are working to make sure that precious public resources go to help the poor, for whom they are intended," he said in a statement.

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