* Benchmark index falls on mining stocks
* Investors cautious ahead of budget on Tuesday
* Gas distributor Envestra jumps on takeover bid (Adds analysis, quotes, stocks on the move)
By Thuy Ong
SYDNEY, May 9 (Reuters) - Australian shares slipped 0.4 percent on Friday morning, hurt by losses in mining stocks and as investors braced for next week's government budget, which is widely expected to unveil a series of spending cuts.
Envestra Ltd was the highlight of the morning session. The stock soared 17.9 percent to all-time highs of A$1.33 as companies controlled by Li Ka-shing launched an unsolicited $1.8 billion takeover offer to other shareholders in the Australian gas distributor, trumping an earlier offer from Australian Pipeline Ltd.
Overall, however, sentiment was undermined by a flat performance on Wall Street overnight, and tensions in the Ukraine.
The S&P/ASX 200 index lost 21.1 points to 5,455.7 by 0230 GMT and is on track to end flat for the week. The benchmark climbed 0.8 percent on Thursday.
The benchmark hit a near six-year high of 5,554.5 on April 29, but has since drifted lower as investors have booked profits and kept to the sidelines over worries about Ukraine.
"There's always going to be concerns about the budget and this week was a big week in terms of event data," said Kara Ordway, market maker and trader at City Index, adding that retail clients were shorting big name banks.
Australia's coalition government will on Tuesday hand down its first budget since winning the election in September, and has already flagged a series of spending cuts.
Risking criticism of breaking a promise of no new taxes, a temporary "deficit levy" of 1-2 pct for upper-income earners is on the cards. A rise in fuel taxes is also reportedly being considered.
The resources sector was the main drag on the market, as Chinese iron ore futures fell for a second day to a six-week low on reduced buying interest from steel mills in top consumer China due to tight credit and high port stockpiles.
BHP Billiton Ltd slipped 0.8 percent, while Rio Tinto Ltd fell 0.6 percent.
China's consumer inflation was subdued in April as growth in food prices moderated, though producer prices fell for a 26th straight month, underlining slow growth in the world's second-largest economy. The data was largely in line and was shrugged off by investors.
Among the 'Big Four' banks, Commonwealth Bank of Australia and Westpac Banking Corp edged 0.2 percent higher, while Australia and New Zealand Banking Group lost 2.8 percent as it traded ex-dividend.
The three banks had touched all-time highs in the past few weeks.
A handful of defensives also traded higher. Blood products maker CSL Ltd rose 0.3 percent while Sonic Healthcare Ltd added 0.5 percent.
Elsewhere, Australia's central bank said record low interest rates are likely to be needed for some time yet as there should be spare capacity in the economy for the next couple of years.
New Zealand's benchmark NZX 50 index slipped 0.2 percent or 11.5 points to 5,150.0. (Reporting by Thuy Ong; Editing by Shri Navaratnam)