UPDATE 1-BHP OKs $822 mln for new iron ore mine in Australia

* BHP says to start digging new iron ore mine in Australia

* Capacity will be 17 million tonnes per year

* Mining to start in mid-2012

SYDNEY, Nov 16 (Reuters) - BHP Billiton has approved $822 million in capital spending to dig a new iron ore mine in Australia capable of yielding 17 million tonnes of ore a year starting in mid-2012.

Development of its Orebody 24 deposit would help maintain production rates at the company's operations in Western Australia state's Pilbara iron belt, BHP said on Wednesday.

BHP is Australia's second largest iron ore company behind Rio Tinto . Both companies hold long-term supply contracts with steel mills across Asia, the bulk in China.

Orebody 24 is a small satellite mine to the massive Mt Whaleback operation -- the biggest single-pit open-cut iron ore mine in the world at more than 5 km long and nearly 1.5 km wide.

"Orebody 24 is a sustaining mine to maintain iron ore production output from the Newman joint venture operations," BHP Billiton said in a statement

Itochu Minerals & Energy and Mitsui-Itochu Iron and Mitsui Iron Ore hold minority stakes.

BHP's share of the cost is $698 million.

Rio Tinto is accelerating a plan to lift output by 50 percent to 333 million tonnes a year by 2015. BHP is aiming for a 37 percent rise in production to 220 million tonnes by around the same time.

BHP closed down 0.6 percent at $36.65, roughly in line with slight losses in the wider market.