DUBAI- Saudi Arabia is setting up a committee to handle the restructuring of debt owed by Saudi Oger, the construction company owned by the family of Lebanese Prime Minister Saad al-Hariri, said two sources familiar with the matter.

Authorities are keen to resolve the financial fallout from the company's collapse after it was crippled by state spending cuts, mismanagement and corruption, leaving thousands of workers and banks out of pocket.

The business is now no longer operational and Saudi banks owed around 13 billion riyals ($3.5 billion) in debt have come under pressure from the regulator in recent quarters to provision for their exposure.

In recent weeks, the central bank has informed lenders that a committee will be formed to handle claims related to Saudi Oger, the first source said.

The construction sector has been hurt by government spending cuts on new projects and delayed payments spurred by low oil prices.

The state is expected to take a stake in another builder, Saudi Binladin Group, as part of a financial settlement after members of the family were detained in an anti-graft crackdown in November.

But while Saudi Binladin Group has been the beneficiary of recent government funds to help turn around its fortunes, Saudi Oger is still owed significant payments, which one of the sources estimated ran into billions of dollars.

The committee, which includes representatives from the labour ministry and justice ministry, will deal with debt owed to staff, service debt and payments owed to the government as a priority, the second source said.

It will also deal with those payments owed by the government, the sources said, while Saudi Oger's debt owed to banks will be dealt with at a later stage.

Neither Saudi Oger or the Ministry of Labour responded to requests for immediate comment.

Mindful of Saudi Arabia's international image, the government is also keen to ensure payments are made to the thousands of Saudi Oger's workers, many of whom are foreign.

While Saudi Binladin Group is believed to have a future after a restructuring of its business, Saudi Oger is not considered to have a role in helping deliver Riyadh's plans to develop property, industrial and tourism projects to diversify the economy away from oil, the sources said.

($1 = 3.7499 riyals)

(Reporting by Tom Arnold; editing by Jason Neely) ((Tom.Arnold@thomsonreuters.com; +97144536265; Reuters Messaging: tom.arnold.thomsonreuters.com@reuters.net))