DUBAI (Reuters) - A London judge has ordered Dana Gas to pay any dividends into an English bank account where the funds must be held until a dispute over its $700 million (508 million pounds) Islamic bond is resolved, sources familiar with the matter said.

Friday's ruling is the latest twist in a complex legal battle taking place in courts in London and the United Arab Emirates which began last year when the UAE energy producer halted payments on $700 million of Islamic bonds it said had become unlawful because of changes in Islamic finance.

Holders of the sukuk contest its position and are demanding to be paid by Dana, which declined to comment on the ruling.

An English high court order blocked Dana from making dividend payments earlier this month unless it also set aside money to redeem the sukuk, although this was subsequently contradicted by the Federal Court of First Instance in the emirate of Sharjah, where Dana is headquartered.

This court last week ordered Dana to suspend any enforcement of the English court's ban on dividend payments.

As a result Dana's shareholders last week approved a cash dividend payment of 5 percent of capital for 2017, equivalent to about 349 million dirhams (69 million pounds).

But on Friday, London Justice Robin Knowles ruled that while Dana can declare dividends to its shareholders, any payment should be held in an English bank account until the dispute between Dana's shareholders and its creditors is resolved.

Justice Knowles rejected an immediate appeal of the ruling by Dana Gas, the sources said.

(Reporting by Davide Barbuscia; Editing by Alexander Smith)