UPDATE 1-Chile says to return $800 mln in profit to Codelco

* Codelco to spend $27 bln from 2012 to 2016 to boost output

* World no. 1 copper producer fighting dwindling grades

* Firm could issue debt later this year, CEO has said

SANTIAGO, June 26 (Reuters) - Chile's government said on Tuesday it would return $800 million of 2011 profits to state copper company Codelco to help the miner meet financing needs.

Codelco, the world's No. 1 producer of the red metal, has an ambitious plan to invest $27 billion from 2012 to 2016 to increase annual copper production to over 2 million tonnes from its current level of around 1.7 million tonnes.

The $800 million would allow Codelco to tap capital markets without risking its investment grade, Finance Minister Felipe Larrain said. It is the second biggest amount the government has returned to Codelco.

Codelco's projects, including transforming century-old, massive Chuquicamata into an underground operation, need to stick to budget and time frames to guarantee profitability, Chief Executive Thomas Keller said in an interview earlier this month.

Codelco to amass around $2 billion this year through its own resources and amortization, Keller said, adding that the company could issue debt later this year if market conditions were favorable.