UPDATE 2-U.S. judge says Harbinger can file plan for Asarco

* Judge wants some Harbinger "assurance" worked out

* Says will rule on next step on June 5 (Adds background on Harbinger, byline)

By Braden Reddall

SAN FRANCISCO, May 26 (Reuters) - Leading Asarco bondholder Harbinger Capital Partners can file its reorganization plan for the U.S. mining company and then work out assurances it is not a "bottom feeder," the judge in the bankruptcy case said on Tuesday.

Last Thursday, hedge fund Harbinger stepped in with its $500 million plan, including the assumption of certain Asarco liabilities, to battle India's Sterlite Industries (STRL.BO) and Asarco parent Grupo Mexico (GMEXICOB.MX) for control of the copper miner.

Asarco, which filed for bankruptcy in 2005 amid more than $1 billion in environmental damage and asbestos claims, is seeking to sell its assets to Sterlite for $1.7 billion.

Harbinger's lawyer told the court its plan would allow for finalizing a deal by the end of August, while also satisfying all asbestos claims, but anyone willing to offer more than $500 million for the Arizona mining company was welcome to do so.

Harbinger, which fought the purchase of coal miner Alpha Natural Resources Inc (ANR.N) by Cliffs Natural Resources Inc (CLF.N) last year before the deal fell apart, is working with Citigroup Global Markets (C.N) and said together they held two-thirds of Asarco's bonds.

Lawyers for Asarco and Grupo Mexico said Harbinger was "bottom fishing" and sought a deposit to show the fund was not just trying to pick up the assets for a bargain, which the judge said could be worked out by the next hearing on June 5.

"I'm going to let you all work on that for a week and then I'll rule on this issue of whether you're going forward with all this at that time," Judge Richard Schmidt of the Southern District of Texas said at the hearing, monitored by phone.

Grupo Mexico, which bought Asarco in 1999, but lacks board control due to the bankruptcy, has made a $1.55 billion offer for Asarco and is asking the court to allow creditors to vote on its reorganization plan as well.

Earlier on Tuesday, the Mexican mining company said it had deposited $1.3 billion in an escrow account to assure creditors it had the cash. [ID:nN26374224]

Harbinger said the plan offered by Sterlite, an affiliate of London-listed Vedanta Resources Plc (VED.L), cannot be confirmed because it will lack votes from asbestos creditors who have agreed to support Grupo Mexico's plan.

Harbinger also sees its plan as better than Grupo Mexico's since it lets Asarco keep a $6.87 billion judgment against the Mexican company that arose from a dispute over the transfer of its one-time Peruvian mining unit, Southern Copper Corp (PCU.N).

The case is In re: Asarco LLC, U.S. Bankruptcy Court, Southern District of Texas, No. 05-21207. (Reporting by Braden Reddall; Editing by Gary Hill and Andre Grenon)