* President holds royalties steady, wins industry applause
* After royalty loss, Rio stands by new oil taxes
* Subsalt break-even cost rises to $60/bbl from $40 - economist (New throughout, adds royalty, details on tax dispute, estimate of tax impact on subsalt oil break-even costs)
By Leonardo Goy and Marta Nogueira
BRASILIA/RIO DE JANEIRO Jan 22 (Reuters) - Brazil will not change the system it uses to calculate oil and natural gas royalties paid by local producers, the government said on Friday, bringing a measure of relief to an industry hammered by plunging crude prices.
The resolution, published in the official gazette, maintains a system used to calculate minimum oil and gas prices. Those prices are used as a basis to calculate royalty payments to the government. The decision was applauded by Brazil's oil industry association IBP.
However, it will likely heighten a dispute with Rio de Janeiro state, responsible for two-thirds of Brazil's oil output and 40 percent of its natural gas. Rio has been pressing the government to update the price methodology.
The dispute has raised the perception of risk in Brazil's oil industry, adding to some investors' to opposition to Royal Dutch Shell Plc's $49 billion purchase of BG Group Plc , Brazil's No. 2 oil producer.
In December, unable to win changes from the government and facing a financial crisis, the state of Rio de Janeiro imposed taxes and fees on oil production.
Rio hopes to raise 1.84 billion reais ($450 million) this year from the taxes. State officials believe the royalty formula undervalues growing volumes of valuable light crude from giant new "subsalt" fields off the coast.
Instead of higher royalties, producers such as state-led Petroleo Brasileiro SA, BG, Shell, Portugal's Galp Energia SGPS SA, Norway's Statoil ASA and Spain's Repsol SA now face higher taxes.
Edmar de Almeida, economist at the Federal University of Rio de Janeiro, says the taxes put "subsalt" development at risk by cutting revenue by about a quarter.
With the taxes, the crude price needed for subsalt areas to break even rises to $60-80 per barrel from $40-50 a barrel. Late Friday, Brent crude futures traded at $31.52, down from more than $100 a barrel in late 2014.
While industry officials plan a court challenge, Rio is sticking to its guns. The state's budget crisis has left public servants unpaid, cut spending on Rio's 2016 Olympic Games in August, and turned the sick away from hospitals.
The government's National Energy Policy Council said on Friday it would maintain its pricing policy "at least until" the rolling seven-day average price for dated Brent crude reaches $50 a barrel. In trading on Friday afternoon, the seven-day average was $29.43. (Reporting by Leonardo Goy in Brasilia and Marta Nogueira in Rio de Janeiro; Additional reporting and writing by Jeb Blount and Reese Ewing; editing by Bernadette Baum and Paul Simao)