HOUSTON (Reuters) -A U.S. court officer overseeing an auction of shares in the parent of Venezuela-owned refiner Citgo Petroleum is recommending a judge choose a $3.7 billion offer by an affiliate of Contrarian Funds to set the floor for a new bidding round this year, according to a court filing on Friday.

A federal court in Delaware is auctioning shares in Citgo's parent PDV Holding to pay up to $21.3 billion to 18 creditors seeking compensation for debt defaults and expropriations in Venezuela.

The court decided this time to set a minimum bid for PDV Holding after most companies in the auction last year rejected a $7.3 billion offer by an affiliate of hedge fund Elliott Investment Management that was subject to the resolution of parallel lawsuits brought by some of the same creditors.

Four potential "stalking horse" bids for shares in PDV Holding were received by a March 7 deadline, the filing said.

The offer by Contrarian Funds' affiliate Red Tree Investments was recommended by the special master in charge of the auction. Judge Leonard Stark must accept or reject it before the auction moves on.

"Red Tree's proposed transaction has the second highest purchase price, and the special master believes it has the least conditionality," the filing said.

"The special master considers that the combination of value and the certainty of the proposed transaction results in its being the best available stalking horse."

Canadian miner Gold Reserve said last week that a consortium including its subsidiary Dalinar Energy Corporation and units of U.S. conglomerate Koch had also submitted an offer.

Red Tree and another affiliate of Contrarian are holders of Venezuelan defaulted bonds and part of the 18 creditors seeking to cash proceeds from the auction, which means that if the group's offer wins they will get their claims paid.

They are jointly claiming about $680 million plus interests and fees, according to court documents.

Red Tree's initial bid was considered low by analysts, taking into account that Citgo's market valuation exceeds $10 billion, but a topping-off period to follow for rival bids to be submitted could increase the final offer, they said.

"This offer would resolve the dispute with the holders of PDVSA's 2020 bonds while raising $1.5 billion to pay other creditors," said Jose Ignacio Hernandez from consultancy Aurora Macro Strategies.

"For Red Tree, it's a financial, not an operational deal. But Venezuela could object it, saying it's too low," he added.

The sale process' final hearing is set for July, according to the court's schedule.

By choosing a starting bid, Stark hopes to maximize proceeds for creditors in the eight-year-long case, which previously found PDV Holding liable for the country's debts. Caracas-headquartered PDVSA is Citgo's ultimate parent.

If it wins the process, the stalking horse would acquire 100% of PDV Holding's shares, with proceeds to be distributed to creditors at closing. Red Tree's proposed transaction provides for $3.24 billion in cash and $458 million in non-cash consideration, according to the court filing.

Houston-based refiner Citgo Petroleum is the crown jewel of Venezuela's overseas assets. Venezuela's President Nicolas Maduro has called the auction a "robbery" of Venezuela's assets in the United States. His government has criticized U.S. oil sanctions on the country, in force since 2019.

(Reporting by Marianna Parraga; Editing by Leslie Adler, Cynthia Osterman and Diane Craft)