UPDATE 1-Main Mongolia parties OK Oyu Tolgoi plan -source

* Current proposal gives Mongolia 34 pct stake in project

* Does not envisage windfall gains tax

By Euan Rocha

TORONTO, July 8 (Reuters) - The caucuses of both major political parties in Mongolia's coalition government have approved Ivanhoe Mines Ltd's (IVN.TO) flagship Oyu Tolgoi copper-gold project, but the plan still needs parliamentary approval, a source familiar with the situation said on Wednesday.

"The caucuses of the two major political parties have approved the draft investment agreement. This agreement now goes to parliament for discussion," said the source, who declined to be named due to the political sensitivity of the situation.

The Canadian exploration company's fortunes are greatly dependent on the success of the Mongolian project and the financial strength of its partner, Rio Tinto (RIO.AX) (RIO.L), which owns about 10 percent of Ivanhoe. Rio could boost that stake eventually to above 40 percent by meeting funding commitments for Oyu Tolgoi.

The source said the proposal as it stands does not envisage a 68 percent windfall gains tax, as indicated in some recent media reports.

It does include an upfront tax payment of $125 million, said the source. This prepayment is at the low end of the $125 million to $225 million range that was widely anticipated.

Ivanhoe's management could not be reached for immediate comment.

Under the deal -- which revives a similar agreement that fell apart early last year -- Mongolia would take a 34 percent stake in Oyu Tolgoi, which is expected to produce an average of at least 440,000 tonnes of copper and 320,000 ounces of gold over a 35-year mine life.

Ivanhoe's shares have risen more than 170 percent year-to-date on speculation that approval of the project is imminent. But the shares were trading 6 percent lower at C$8.99 on the Toronto Stock Exchange in midday trade on Wednesday as analysts remained cautious.

"Despite the support of both major parties, the MPRP and the DP, caucus discipline is much weaker in Mongolia than in, say, Canada," said Salman Partners analyst Raymond Goldie.

"Thus passage of the legislation authorizing the agreement is by no means assured before parliament breaks for summer," he said, adding that the share price was also likely hurt by a lower copper price on Wednesday.

Ivanhoe's shares jumped last week soon after Rio Tinto said the bulk of its $15.2 billion rights issue had been successfully completed. The rights issue will help Rio cover its immediate debt servicing needs and free up capital to invest in projects such as Oyu Tolgoi.

Rio has been struggling to pay down billions in debt from its 2007 acquisition of Canadian aluminum producer Alcan.

Ivanhoe, earlier on Wednesday, announced that it has appointed former Canadian Prime Minister Jean Chretien as a senior international adviser to the company.

($1=$1.17 Canadian) (Reporting by Euan Rocha; editing by Peter Galloway)