WRAPUP 3-China holds Rio exec as spy; iron ore deal in doubt

* Rio exec detained on suspicion of espionage-Australia

* ForMin says surprised, no evidence of commercial link

* China paper reports mills agree 33 pct iron ore price cut

* Steel mill execs, Rio says deal not done yet, talks ongoing (Updates with steel mills, Rio saying talks still on)

By Tom Miles and Fayen Wong

BEIJING/PERTH, July 8 (Reuters) - Chinese authorities are detaining Rio Tinto Ltd's (RIO.AX)(RIO.L) top iron ore negotiator on suspicion of espionage and stealing state secrets, Australia said on Wednesday, threatening to strain already fraying ties.

Details about the detention of Stern Hu, as well as three other Rio employees, emerged just as a Shanghai paper reported Chinese steel mills have finally given in on annual iron ore prices, conceding to a 33 percent cut for six months, although both Rio Tinto and Chinese executives said talks were ongoing.

It was unclear whether there was any tie between the two, but the detention follows a period of increasingly tense relations between the two vast trading partners, with iron ore negotiations running past the June 30 deadline and Rio snubbing a planned $19.5 billion investment by Chinalco last month.

"I see no basis in any of that speculation," Foreign Minister Stephen Smith told reporters in Perth in response to talk the move was related to iron ore or the Chinalco deal.

Smith also said he was very surprised by the detention and reasons for it and that the Australian government was still trying to seek access to Hu. He said there was the prospect Hu could be charged with criminal offences under Chinese law.

Rio, which first confirmed the detentions a day ago, said it was aware of the allegation.

"We have been advised by the Australian government of this surprising allegation. We are not aware of any evidence that would support such an investigation," a Rio spokeswoman said.

Rio said the Shanghai office where the detained staff worked was mainly a sales and marketing operation for the company, the world's second-biggest iron ore producer.

On June 5, Rio announced it had dumped plans for a $19.5 billion investment from state-owned Chinese metals firm Chinalco and instead sealed an iron ore joint venture with rival BHP Billiton (BHP.AX) (BLT.L) [ID:nSYD73514].

Several days later, China's official Xinhua news agency slammed Rio's "perfidy" for scrapping the deal. [ID:nPEK180004]

IRON ORE DEAL SAID