* Grasberg output cut 60 pct but no layoffs -union official
* Freeport says milling rate half normal level since mid-Jan
* Freeport talks with govt continue 2 months after new rules
* Freeport says tax breaches contract
By Yayat Supriatna
JAKARTA, March 11 (Reuters) - Freeport-McMoRan Copper and Gold Inc has cut ore production at its Indonesian copper and gold mine by around 60 percent, a union official said, two months after the U.S. miner halted exports over a dispute with the government on a new tax.
Freeport's Indonesian unit runs the world's fifth-largest copper mine in remote Papua and any prolonged stoppage in production would be supportive for global prices of the base metal, while increasing the risk of layoffs in a volatile area with a simmering separatist movement.
Freeport and fellow U.S. miner Newmont Mining Corp have refused to pay an escalating export tax introduced on Jan. 12 as part of package of new mining rules aimed at forcing miners to build smelters and process raw materials in Indonesia.
"Although Freeport Indonesia has cut production by around 60 percent, Freeport management has not yet announced any layoffs so far," Papua-based Freeport union official Virgo Solossa told Reuters by telephone.
"They are still waiting for a government decision on an export tax relaxation," he said, adding that copper concentrate processing facilities were now working at one-third of capacity.
A Freeport spokesman said that since mid-January, the milling rate at its Indonesian operations has averaged around 112,000 tonnes of ore a day, which is about half of the normal rate.
PT Freeport Indonesia has implemented these near-term changes to coordinate its concentrate production with the operating plans of PT Smelting, company spokesman Eric Kinneberg said in an email, referring to the country's only copper smelter.
It was unclear how long the production cut would remain. Freeport late last month said it may need to declare force majeure on copper concentrate sales at Grasberg.
The Arizona-based company has been locked in talks with the government for weeks over the controversial export tax on mineral concentrates, which rises from 25 percent this year to up to 60 percent by the second half of 2016.
Disputes and confusion over the new export rules have halted about $500 million worth of monthly mineral ore and concentrate exports from Southeast Asia's biggest economy.
Freeport says that the tax breaches their contracts, although the government has hinted that it may review the tax if Freeport makes a firmer commitment on the construction and supply agreements for new smelters.
Freeport and state-owned PT Aneka Tambang have joined forces to study the possibility of building a copper smelter but this is expected to take months before it is completed.
The company currently ships about 40 percent of its copper concentrates production to PT Smelting at Gresik.
Freeport said in December that if it was only allowed to send shipments to PT Smelting, the company would have to cut output at its Grasberg mine in Papua by 60 percent and lay off thousands of its employees.
In metal markets, three-month copper on the London Metal Exchange climbed about 0.7 percent to $6,696.50 a tonne on Tuesday, off Monday's trough of $6,608 a tonne - its lowest since late June.
"Ultimately, the metal market balance would not be tight as a result of Freeport processing at a lower rate over the course of a few weeks," said a source at a Singapore-based trade house.
"If they were to come out to declare a force majeure and say that they were going to be operating at a substantially reduced rate for many months to come, yeah it might help sentiment."
Freeport's shares were down 2.5 percent at $30.60 on the New York Stock Exchange on Tuesday, along with other base metals stocks, hurt by copper's slide to its lowest levels in more than three years.