Investment group Blackstone is planning a counterbid for Rio Tinto Ltd/Plc with a consortium believed to include China's sovereign wealth fund, Britain's Daily Telegraph newspaper said on Monday.

Blackstone declined to comment on the report that it was targeting Rio, which has already rejected a proposed $140 billion three-for-one share takeover offer by rival miner BHP Billiton Ltd/Plc.

Private equity firm Blackstone, which as owner would seek to break up Rio's assets, is believed to have appointed lawyers for the approach, and is in talks with bankers, the Telegraph said in an unsourced article on its Web site.

A person close to Blackstone said the report was not true.

London-traded Rio stock slipped 1.1 percent to 5,683 pence by 7:15 a.m. ET BHP eased 0.3 percent to 1,671 pence by that time.

Chinese banking sources familiar with the situation told Reuters Blackstone and some other foreign banks and private equity firms had been lobbying the Chinese government very hard to suggest that Beijing should join the bid.

However, there was so far no solid result or official decision, the sources said.

Blackstone is lobbying China for their own sake as Blackstone wants to see the bidding price higher and this will be definitely good for Rio's minority shareholders, said one of the sources. So are other private equity firms or foreign banks.

A London-based person familiar with the BHP-Rio deal said it was unlikely banks would lend Blackstone and the Chinese the money to finance such a large bid.

In these markets how could they ever finance it? Credit markets have shut down, he said.

The Telegraph report is the latest in a series to name parties interested in trumping BHP's offer for Rio Tinto.

Last week Baosteel, China's biggest steel group, doused speculation it was planning to spoil BHP's proposal for Rio Tinto with an offer of its own, saying it lacks the financial muscle.

The Telegraph said Blackstone believes Rio Tinto's key iron ore operations alone are worth at least $110 billion.

Blackstone was ready to break up Rio completely, which would include undoing the company's merger with aluminum producer Alcan as well as selling off its iron ore business, according to the report.

Blackstone already has strong links with the Chinese after China Investment Corp, the $200 billion sovereign wealth fund, paid $3 billion for a 10 percent stake ahead of Blackstone's flotation.

In Australia, Rio Tinto closed up 0.8 percent at A$146.70, while BHP ended up 0.2 percent at A$43.59.

Rio accounts for 3.2 percent of the Australia's benchmark S&P/ASX 200 share index, and Chinese ownership of such a company could ignite a political firestorm for Australia's new prime minister, Kevin Rudd.

Australia has been happy to allow smaller mining companies to fall into foreign hands, but has also been protective, blocking a takeover of oil company Woodside Petroleum Ltd by Anglo-Dutch energy group Shell in 2000, citing national interest.

(Additional reporting by Eleanor Wason in London and George Chen in Shanghai; Editing by Louise Ireland)

Australia United kingdom China Investment