* Indonesia says will use export tax to encourage processing
* Nickel price, miners rally on potential export ban impact
* Freeport halts copper exports to await clarity on rules (Recasts, adds detail)
By Wilda Asmarini and Michael Taylor
JAKARTA, Jan 13 (Reuters) - Indonesia's mining sector was left in turmoil on Monday after the government pushed through a controversial ban on exporting unprocessed mineral exports.
Global nickel prices and mining shares rallied in the first trading day after the ban in the world's top nickel ore exporter. The ban on a range of mineral ores took effect on Sunday, five years after a law was passed to force miners to build processing plants.
The government provided a last-minute reprieve for exporters to keep shipping some minerals, although U.S. miner Freeport McMoRan Copper & Gold was waiting for confirmation so that it could continue to ship copper.
The policy aims to reduce reliance on raw material exports, but many firms failed to invest in enough smelter capacity to process all of Indonesia's mining output -- meaning that a total ban would have forced extensive shut downs of output and cost the economy billions of dollars.
Late changes approved by President Susilo Bambang Yudhoyono -- to ease any short-term economic pain -- should allow copper exports by Freeport and Newmont Mining Corp.
The government has yet to publish the regulations clarifying those changes and offered no such relief to the nickel and bauxite industries, sparking a rally in the long-depressed nickel price as well as gains for miners.
Freeport has halted copper exports from its remote Grasberg mine -- one of the world's largest copper mines -- pending clarification and government approval to resume shipments.
Freeport Indonesia CEO Rozik Soetjipto told Reuters at the weekend he believed the company, which smelts only about a third of its output, would be allowed to keep shipping copper concentrate.
"Everybody is in a wait and see phase. It is a very strange situation," said Agus Suhartono, chief operating officer at nickel miner Ibris Nickel, which does not have a refinery yet and halted operations this month.
Indonesia is the world's biggest exporter of nickel ore, as well as refined tin and thermal coal, and home to the fifth largest copper mine and top gold mine.
London Metal Exchange nickel rose 4 percent on Friday and added a further 1.4 percent on Monday, helping push up shares of Indonesian nickel miner PT Vale Indonesia by 5.4 percent and state-owned PT Perusahaan Perseroan Aneka Tambang (Antam) by 1.5 percent.
Energy and Mines Minister Jero Wacik said there were 66 companies that would be exempt from the ban because they have or plan to build smelters for their unprocessed minerals.
PT Vale Indonesia is not affected by the ban as it already processes its nickel into nickel-in-matte, an intermediate product, but hundreds of small firms which simply ship low-grade ore will be.
Among other nickel miners, Australia's Western Areas rose nearly 9 percent, while the Philippines' Nickel Asia Corp. was up 5.7 percent by 0730 GMT.
Nickel may rise further, but a break above $15,000 a tonne -- which has capped its trading band for the past six months -- could be a sell signal, a Singapore-based metals trader said.
News that Indonesia had watered down its mineral ore ban to limit any sharp fall in export revenue, helped push the rupiah currency up more than 1 percent to 12,020 per dollar, its strongest since Dec. 12.
Releasing further details of the policy, the mining ministry said on Monday that Indonesia will regulate mineral concentrate exports through a progressive tax under the new regulation signed by the president on Saturday.
The tax, which will increase up until 2017, will be aimed at forcing miners to start building smelters and refineries for copper, iron ore, lead, zinc and manganese concentrate, said Sukhyar, director general of coal mines and minerals at the energy and mines ministry. All mineral concentrate exports will be banned from 2017.
Finance Minister Chatib Basri said the tax for copper concentrate would rise to a maximum 60 percent of a shipment's value by the second half of 2016 from 20 percent now.
The jump in taxes will make it less economically viable for Freeport and Newmont to continue exporting copper concentrate.
"If you add another 30 percent export tax, it doesn't make it economically feasible to export and so you're back to square one. So any celebration right now in companies like Freeport is muted. The situation is confusion squared," said Andrew White, managing director of American Chamber of Commerce in Indonesia.
The nickel price, wallowing near four-year lows, had earlier failed to react to the looming ban because of oversupply and scepticism over whether Indonesia would implement the policy.
Indonesia accounts for about 15 percent of global nickel supplies. It is a major supplier to China where its high grade laterite nickel, found only in tropical regions, is used to produce nickel pig iron, a cheaper alternative for making stainless steel than high-purity nickel.
In Indonesia, the ban has already led to the lay-off of almost 30,000 mine workers as mines cut back operations, according to the Indonesian Mineral Entrepreneurs Association.
Mine lay-offs have already sparked protests in Jakarta and thousands more could see the export ban become a hot political issue in 2014's legislative and presidential elections. (Additional reporting by Yayat Supriatna, Eveline Danubrata, Rieka Rahadiana, Kanupryia Kapoor and Andjarsari Paramaditha in Jakarta and James Regan in Sydney, Writing by Randy Fabi, Editing by Richard Pullin, Simon Webb and Ed Davies)