By Andrew Quinn

SAN FRANCISCO (Reuters) - Embattled Internet music upstart Napster Inc. was handed a new lease on life Friday as German media giant Bertelsmann BTGGga.D stepped in with $8 million to buy its assets and keep the online song-swap service in business.

The surprise deal also brought Napster Chief Executive Officer Konrad Hilbers and founder Shawn Fanning back into the fold just days after they quit the company amid fears that mounting legal, financial and technical problems would silence Napster for good.

"While this has been a very unusual week, I'm pleased that I and my colleagues can move forward and give our full attention to Napster's future," Hilbers said in a statement.

Bertelsmann's agreement to provide $8 million for Napster's creditors will allow the company to file for Chapter 11 bankruptcy protection and emerge as a wholly-owned subsidiary of Europe's second-largest media group, officials said.

It will then resume its much-delayed plan to relaunch as a subscription digital music service that complies with U.S. copyright law.

Analysts said the deal, which gives Bertelsmann control of Napster for far less than the $15 million to $30 million it might have cost to buy the company outright, could nevertheless prove a good deal for the online music company.

"This development could very well breathe new life into this Napster," said Phil Leigh, a financial analyst at Raymond James & Associates.

A HOT PROPERTY GONE COLD

Napster, once one of the hottest properties on the Internet, has been offline since July 2001 as it fights a music piracy lawsuit by major record labels.

The service this week signaled it was nearing the end of the game as Hilbers, Fanning and several other senior executives quit after a dispute among board members derailed a Bertelsmann bid to buy the company outright.

That quarrel was resolved by a Delaware court Tuesday, setting up a new Napster board chaired by Hilbers.

Bertelsmann, which broke ranks with other music companies by buying a stake in Napster in 2000, said it was now ready to help push the company toward its goal of becoming a secure, membership-charging service.

"Creating new ways of doing business is never easy, but Napster will be at the forefront of finding business models that respect copyright, reward artists, and deliver entertainment value to consumers," Joel Klein, chief executive of the U.S. arm of Bertelsmann, said in a statement.

"Peer-to-peer is a transforming technology and we're proud to have Shawn Fanning continue to work on its development."

A NEW VISION FOR NAPSTER

Fanning, who founded Napster as a college student in 1999 and will now serve as the company's chief technology officer, said he was pleased to be moving forward with Bertelsmann.

"Bertelsmann understood our vision when they first invested in us," Fanning said. "They still believe in that vision."

Fanning's vision was in part what landed Napster in trouble in the first place.

While wildly popular with millions of users around the globe, the service quickly drew the ire of the recording industry, which in late 1999 filed suit charging it with abetting music piracy by allowing users to download digital music files from other people's computers without paying any royalty fees to copyright holders.

Lengthy litigation resulted in a court injunction which barred the service from offering copyrighted songs identified by the labels.

While Napster now says it will relaunch as a royalty-paying service, company officials concede there have been both technical difficulties in setting up the system and contract difficulties with record labels declining to provide licenses for their music.

"The biggest remaining job for Bertelsmann is to get content, to get the other record labels to agree to use Napster," said Leigh of Raymond James.

Sources close to the company said Friday they still had no firm date for the Napster relaunch, but would said it would only take place once all the kinks had been worked out.

"For Bertelsmann this is a long-term play," one source said, adding that Napster's high brand visibility, established "community" of users and peer-to-peer format were all assets.

Jupiter Media Matrix analyst Stacey Herron said that while Napster remained the most famous of the digital music services, it would still face competition from newer companies that have sprung up during the long months of litigation.

"This announcement certainly doesn't secure the future of Napster as a thriving business," Herron said.

"You can't simply turn back the clock and make Napster what it was two years ago."