UPDATE 1-Zale must pay or Citibank will sever agreement

NEW YORK, June 18 (Reuters) - Zale Corp said its merchant services agreement with Citibank will be terminated unless the U.S. jewelry chain pays the bank $1.125 million by July 16 to make up for a shortfall in sales volume from credit cards.

Zale said in a securities filing on Friday that if it makes the payment to Citibank, their agreement will remain in effect until its original expiration date in March 2011.

Citibank had already warned Zale it would terminate the agreement unless Zale paid the bank by April 1 for a shortfall to the minimum volume of credit sales as set forth in the agreement, dated July 10, 2000, the jeweler said.

The April 1 deadline was extended to June 15, at which time Zale said it paid Citibank $5.36 million as compensation for the minimum volume shortfall. The following day, Citibank said it would terminate the deal in 180 days unless Zale pays an additional $1.125 million by July 16 for a subsequent shortfall.

(Reporting by Martinne Geller; editing by Gunna Dickson)

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