(Corrects spelling of U.S. vice president's name, paragraph 8)

By Fergus Jensen

JAKARTA, April 12 (Reuters) - Losses amounting to hundreds of millions of dollars appear to be pushing the Indonesian government and mining giant Freeport McMoRan to resolve a row that has crippled operations at Grasberg, the world's richest copper mine, for three months.

Freeport says it has lost revenue of about $1 billion since the export of copper concentrate from Grasberg was halted on Jan. 12 under new rules issued by the government. The government has lost millions of dollars in royalties and is worried about layoffs and a slowing economy in the restive Papua region, where the giant mine is located.

"There's a lot of grandstanding in public – that, with our economy being close to a $1 trillion a year now, Freeport is a small matter," said a senior Indonesian government official, who estimated the lost royalties and taxes from the mine at about $1 billion a year.

"But truth be told, a $1 billion a year reduction in fiscal revenue is a lot," said the official, who spoke on condition of anonymity.

Indonesia halted Freeport's copper concentrate exports under new rules that require the Phoenix, Arizona-based company to adopt a special license, pay new taxes and royalties, divest a 51 percent stake in its operations and relinquish arbitration rights.

Freeport threatened in February to take the dispute to arbitration, saying the rules were "in effect a form of expropriation".

But now, Indonesia has promised to allow Freeport to export its copper concentrate once again, while negotiations continue over the next six months on contentious issues, including on divestment, economic and legal protection and smelting investment.

The compromise comes ahead of a visit to Indonesia by U.S. Vice President Mike Pence next week. Pressure to resolve the row could also come from Freeport's third-biggest shareholder, activist investor Carl Icahn, who has been appointed a special adviser to President Donald Trump.

For Indonesia, tensions at Grasberg could hamper its efforts to calm the Papua region, where a low-level insurgency has simmered for decades. The mine's social and environmental footprint also remains a source of friction.

Papua's GDP growth is expected to drop to 3 percent this year due to the Freeport dispute, down from 9.21 percent in 2016, according to the Papua branch of Indonesia's central bank.

A slump in Papua's economy could aggravate tensions with Jakarta, complicating efforts by President Joko Widodo to enforce policies to extract more from its natural resources.

"When there is a crisis at Freeport, it will send major ripples through Papuan society," said Achmad Sukarsono, an Indonesian expert at the Eurasia consultancy.

PAPUA ECONOMY

In Timika, a sprawling town of around 250,000 people and a supply hub for Grasberg, the Freeport dispute has hit businesses, caused a slump in house prices and stalled credit, residents say.

Mastael Arobi, who owns a car rental business there, has cut his fleet by two-thirds because of slow business and is worried about the interest he pays on loans.

"We are half-dead thinking about repayments," he said.

Transport operators in Timika had similar complaints, with a motorcycle taxi driver saying it was hard to make even a third of the up to 300,000 rupiah ($22.50) he used to make each day.

"Since these furloughs and layoffs began we have stopped providing credit to Freeport workers," said Joko Supriyono, a regional manager at Bank Papua in Timika, who said ATM transactions had declined by around two-thirds since January.

Freeport, which employs more than 32,000 staff and contractors in Indonesia, has now "demobilised" just over 10 percent of its workforce, a number expected to grow until the dispute is resolved.

Persipura, the main soccer club in Papua and one of Indonesia's most decorated teams, announced last month that Freeport, its top sponsor, had stopped its funding.

Indonesian Vice President Jusuf Kalla said in a recent interview that while he did not anticipate political pressure, Washington should not politicise the Freeport issue.

Another Indonesian government official said moves to allow Freeport to export temporarily were aimed at showing that the government is willing to find a solution, and to send a positive message, especially to foreign investors, who are watching the saga closely.

"We are not changing our stance. Our basic stance on 51 percent divestment, our demand for smelters - all that is still there. But in negotiations, you should give a little to assure the other side that we are still open to some options," said the official.

The two sides had opted for a temporary solution to break a deadlock in issues that "cannot be resolved quickly," said Bambang Gatot, Director General of Coal and Minerals in the mining ministry,

A spokesman for Freeport Indonesia declined to comment on the warming ties with the government.

A senior Freeport McMoRan executive said last week the company was awaiting details of a temporary export permit from the Indonesian government that would allow it to ramp up production. ($1 = 13,330 rupiah)

(Additional reporting by Hidayat Setiaji, Wilda Asmarini and Kanupriya Kapoor in JAKARTA and Samuel Wanda in TIMIKA; Writing by Ed Davies; Editing by Raju Gopalakrishnan)