UPDATE 1-Australia business investment slips; mining tax a risk

* Business investment falls in Q1; to drag down GDP

* Interest rates seen in hold next week

* Future spending plans strong but mining falters

* Uncertainty over mining tax may play out in future

By Anirban Nag

SYDNEY, May 27 (Reuters) - Australian business investment surprisingly fell last quarter as manufacturers cut spending, suggesting downward risks to growth and backing expectations that interest rates will remain on hold for the rest of 2010.

Data released on Thursday also showed firms revised down spending plans for the current fiscal year to June, but they were still set to increase investments for 2010/11 compared to an estimate made three months ago.

The Australian dollar AUD=D4 slipped while June bank bill futures YBAc1 ticked up after data showed first quarter capital spending fell 0.2 percent to A$27.70 billion ($22.82 billion), seasonally adjusted, below expectations of a 1.4 percent rise. "The surprise fall in private investment spending in the March quarter means we will be pushing through a downgrade to our 0.7 percent forecast for Q1 GDP growth," said Stephen Walters, a chief economist at JPMorgan.

First-quarter gross domestic product figures are due on June 2 and analysts had forecast a pick up in growth but may revise predictions as spending on equipment and machinery feed directly into the GDP report. First-quarter expenditure on plant and machinery fell 6.0 percent from the fourth quarter.

The soft capital spending figures come a day after first-quarter construction sector numbers showed spending by the private sector contracted, backing market expectations that rates are likely to be on hold for the rest of this year.

"The RBA will leave the cash rate steady at 4.5 percent next Tuesday, which will signal the start of a policy pause," Walters added. "The pause will be extended for longer if the volatility in financial markets spills over into the real economy."

The Reserve Bank of Australia's (RBA) monetary-policy board meets Tuesday and is expected to keep rates on hold as the recent turmoil on financial markets overshadows domestic factors.

Investors see rates on hold at 4.5 percent CSRBA1Y=CSAU over the next 12 months, but markets are also pricing a 10 percent chance of a rate cut on June 1 CSRBA=CSAU. Until recently, they had been betting on another hike.

The RBA has been one of the most aggressive central banks in withdrawing monetary stimulus, raising the cash rate by 150 basis points since last October.

MINING TAX YET TO PLAY OUT

The central bank has raised rates to prevent an asset bubble, fuelled partly by a terms of trade boom and to check the inflationary impact from a mining boom.

However, data on Thursday showed second estimates for capital spending by the mining sector was revised down for 2010/11. That comes amid a tense debate about a proposed mining tax.

For more on the proposed tax click on: [ID:nAUTAX]

Miners have warned that they would cut investments if the 40 percent super profit tax was approved but Thursday's survey is yet to reflect changed spending intentions due to the tax.

Iron ore miner Fortescue (FMG.AX) has alone threatened to pull $15 billion in projects while giant rival, Rio Tinto (RIO.AX) has put local investment plans under review, calling Australia its top sovereign risk concern because of the tax plan.

Analysts say the extent to which the proposed mining tax will play out on Australia's investment pipeline will be better reflected in the June quarter survey, released in August.

"Interpreting the results of the survey this time has been particularly complicated by the fact that the government's announcement of the super profit tax," George Tharenou, economist at UBS said.

Capital spending plans by miners have been upgraded in the past to meet strong demand for resources from China and India. The RBA estimates mining investment could reach 6 percent of Australia's trillion dollar GDP by 2011, up from just 1.5 percent a decade ago. Investment in liquefied natural gas might rise from 0.5 percent of GDP now to 2.5 percent in four or five years.

But all that could be threatened by the proposed mining tax.

"This (capital spending) isn't a number that would be consistent with booming private sector investment. Indeed private sector investment looks set to detract from Q1 growth," said Adam Carr, senior economist at ICAP. (Editing by Balazs Koranyi)