By Lomi Kriel

MEXICO CITY (Reuters) - Sacyr , the Spanish building company leading a consortium expanding the Panama Canal, said on Friday it was making progress in negotiations with the waterway's operator over financing to avoid a damaging work stoppage on the massive project.

Visiting Panama, Sacyr Chairman Manuel Manrique played down an acrimonious spat over cost overruns, in which the consortium demanded more money from the canal administrator to continue work.

He told Reuters the consortium, which includes Italian builder Salini Impregilo , would process its claim for $1.6 billion in cost overruns via arbitration. The canal authority and consortium have both floated financing proposals, but it was not immediately clear how they would ensure cash-flow in the short term to keep the project going.

Earlier this month, the consortium threatened to halt work on January 20 unless the Panama Canal Authority footed the bill.

(Reporting by Lomi Kriel, writing by Simon Gardner)