UPDATE 2-Mongolia ends $2 bln Tavan Tolgoi stake sale-sources

* Government cancels auction of 49 percent stake - sources

* Mongolia to hold 100 pct of Tavan Tolgoi coal deposit

* JP Morgan, Deutsche Bank no longer advising on sale

* Mongolia seeking contract agreement with global miner (Adds analyst comment, details)

By Joseph Chaney, Asia Resources Correspondent

HONG KONG, Feb 4 (Reuters) - Mongolia's government has cancelled the auction of an estimated $2 billion stake in one of the world's largest untapped coal deposits, ending the hopes of global mining giants eager for a slice of the project, sources with direct knowledge of the matter said.

JP Morgan (JPM.N) and Deutsche Bank (DBKGn.DE) are no longer advising on the sale of the 49 percent stake, three sources told Reuters on Thursday. The two banks were retained more than a year ago to run the auction.

Shortlisted bidders for the stake in Tavan Tolgoi -- which holds estimated reserves of 6.5 billion tonnes of coking coal -- included heavyweights BHP Billiton (BHP.AX), India's Jindal, Brazil's Vale (VALE5.SA), U.S. coal miner Peabody (BTU.N), and China's Shenhua (1088.HK).

A South Korean consortium, a group of Japanese companies, and a Russian consortium including Gazprom (GAZP.MM) and Renova were also named as bidders. Mongolia's state-owned Erdenes MGL was originally slated to own at least 51 percent of the project.

Mongolia's government has now decided to keep 100 percent of the huge coal deposit, the sources said. The reversal shows the determination of the government to fully control one of the landlocked country's most valuable natural resources.

Mongolia has struggled to develop a consistent strategy when it comes to overseas companies buying into national assets.

It concluded a drawn-out deal last year to develop Oyu Tolgoi, a massive copper and gold project, with Ivanhoe Mines (IVN.TO) and Rio Tinto (RIO.L)(RIO.AX). Prior to that deal, however, worries festered in the local press that the country was selling too much of its most valuable resources.

Now, for Tavan Tolgoi, the government hopes to strike a deal with a global miner to develop the deposit on a contract basis, without a significant equity holding in the project.

"The establishment's motto is 'What's best for Mongolia, what's most profitable for Mongolia?' In the prime minister's view, contract mining is the best deal," said Dale Choi, an analyst at Ulan Bator-based Frontier Securities.

"As long as we get someone like Peabody to come in, it's fine," Choi said. "But if we lose Peabody, than it's not a good move."

Mongolia has hired an independent consultant through the World Bank, the three sources said. The investment banks stopped working for the government in January, one of the sources told Reuters.

Deutsche Bank and JP Morgan both declined to comment. All three sources declined to be named because they were not authorised to speak publicly about the matter.

"There were two options," government spokesman Gombosuren Unurbayar said when contacted by Reuters on Thursday.

"One is 49:51 with the last portion owned by Mongolian government. The second option is 100 percent owned by Mongolia. The prime minister gave several directions to the working group of Tavan Tolgoi where he made clear his preference for the second option."

SETBACK?

Mongolia has long frustrated the global resources industry for dragging its feet on investment decisions. The government, hobbled by indecision and bureaucratic infighting, took years to conclude the agreement to develop the Oyu Tolgoi copper and gold project.

The Oyu Tolgoi deal, in which Mongolia will retain a 34 percent interest, was seen at the time as a precedent for future deals such as Tavan Tolgoi.

Mongolia had earlier planned to select the winners for the Tavan Tolgoi stake sale by the end of this year, following quickly on the conclusion of negotiations over Oyu Tolgoi.

"There has been a lot of backlash on the Oyu Tolgoi agreement -- the masses feel that Mongolia only got a little," said Choi.

"It could be politically motivated but I'm not sure," he said of the government's plan to own all of Tavan Tolgoi.