* Government says to free militant leader after deal reached

* Terms of amnesty and release still under discussion

* Main militant group still unhappy with amnesty programme

(Adds MEND comment, paragraph 9, 18)

By Randy Fabi

ABUJA, July 9 (Reuters) - Nigerian militant leader Henry Okah, who is on trial for gun-running and treason, welcomed a government amnesty offer and could soon be released, lawyers told Reuters on Thursday.

Okah is the suspected leader of the Movement for the Emancipation of the Niger Delta (MEND), the region's main militant group, whose attacks in the last six weeks have wreaked havoc on Nigeria's oil sector.

If Okah is released, it would raise hopes that other militants would lay down their weapons in the Delta, the heart of Africa's biggest oil and gas industry.

President Umaru Yar'Adua, who announced an amnesty programme for all Niger Delta gunmen last month, extended the clemency offer to Okah and promised to release him if he accepted.

"They offered it to him yesterday. Okah welcomed the amnesty," one of Okah's lawyers, Wilson Ajuwa, said by telephone. "We are in the process of finalising it. Hopefully, it will be resolved early next week."

The presidency confirmed that Okah would be released, but details of the agreement still needed to be worked out.

"The president is delighted to hear that he has accepted the amnesty offer," said spokesman Olusegun Adeniyi on the sidelines of the G8 summit in Italy. "With his acceptance, he will be released when the formalities are concluded."

A meeting between Okah's lawyers and government officials was expected on Sunday or Monday to finalise the terms of the amnesty and his release, a second Okah lawyer said.

A MEND spokesman welcomed Okah's decision to accept the deal, but again dismissed the amnesty programme in its current form.

SUSPECTED ARMS DEALER

Okah was arrested in Angola in September 2007 and extradited to Nigeria to face charges carrying a possible death penalty. They included supplying machine guns, rocket-propelled grenade launchers and bazookas to armed groups in the Delta.

The rebel leader still commands support from well armed factions, and his trial in the central city of Jos has been watched closely by his supporters.

Okah's deteriorating health has been an increasing concern, with his lawyers saying he needs urgent treatment overseas.

The militant's release has been one of the key demands from MEND, a loose faction of rebel groups that began routine attacks against the military and oil sector in early 2006.

MEND, which says it is fighting for a fairer share of the region's wealth, opened a fresh front of attacks against the oil sector in late May following the launch of the military's largest offensive against Niger Delta gunmen in years.

Royal Dutch Shell <RDSa.L>, U.S. oil major Chevron <CVX.N> and Italy's Agip <ENI.MI> have cut a total of around 300,000 barrels of oil per day due to the violence.

MILITANT REACTION

Even if Okah were released, it was not clear whether MEND or other militant groups would lay down their weapons.

The unrest in the delta, one of the world's largest wetlands, is not a straightforward political struggle and sceptics question whether amnesty alone will be enough to halt a cycle of opportunistic attacks, oil theft and kidnapping.

MEND said it was willing to discuss its demands with chief amnesty negotiator Timi Alaibe, who the president appointed on Wednesday.

Militant leader Ebikabowei Victor Ben, locally known as Boy Loaf, said Okah's release would increase the likelihood of more militants taking part in the amnesty programme, but more needed to be done to restore peace.

"Okah's release is not the end of it all," he told Reuters. "There are other issues, especially the development of the Niger Delta region."

Even if militant leaders agree on paper to a ceasefire, there is little to stop splinter groups with speedboats and dynamite from attacking hundreds of kilometres of exposed pipeline or continuing abductions and ransom demands. (Additional reporting by Camillus Eboh, Austin Ekeinde in Port Harcourt, and Felix Onuah in L'Aquila, Italy; Editing by Charles Dick)

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