* Eskom powers Africa's biggest economy
* Utility says any strike would be illegal
* High wage settlements hurting economy (Recasts with Eskom comment, details, background)
By Ed Stoddard
JOHANNESBURG, Sept 8 Workers at South African state-run utility Eskom are preparing to strike after wage talks failed, one union said on Thursday, prompting the power provider to rule any stoppage illegal because it provides an essential service.
The strike and possible subsequent electricity cuts could have a crippling impact on the world's largest platinum producer and hobble a fragile economic recovery.
But Eskom could avert the action by questioning the legality of a strike, possibly in the courts.
"The talks have collapsed, we are now preparing to go on strike," said Lesiba Seshoka, a spokesman for the National Union of Mineworkers.
Eskom said the company was protected by its status as an essential service provider.
"Any strike by Eskom employees would be illegal because Eskom is an essential service," said spokeswoman Hilary Joffe.
NUM is demanding a 13 percent wage increase while Eskom, which supplies virtually all power to Africa's biggest economy, is offering 7 percent.
Inflation is currently at 5.3 percent and South African wage settlements in other sectors, notably mining, have been in the 8 to 10 percent range this year.
Economists say the wage settlements are eroding the country's investment profile, making its workers more expensive and less productive than those in its emerging market rivals. There is little political will to reign in the unions as the ruling African National Congress is allied to organised labour.
Late on Wednesday, the mediator -- the Commission for Conciliation, Mediation and Arbitration (CCMA) -- issued a "certificate of non-resolution" to NUM and two other unions in the talks, a necessary step toward legal strike action.
NUM said the CCMA had suggested arbitration as the next step but the union had rejected this route. Under arbitration, both sides present their case and a commissioner then makes a ruling which the two parties have to accept.
"We don't want to go to arbitration, that drags things out ... it is up to us to go on strike now," Seshoka said.
Unions have been angered by what they say was an attempt by Eskom to unilaterally impose the 7 percent hike.
Eskom says that if the increases are not implemented in the September pay roll then workers will have to wait until November to get any raise because of an upgrade to the system which will take place in October.
Eskom has a workforce of about 40,000 and says about 27,000 of its employees are unionised. Of the three unions represented there, NUM is the biggest with about 16,000 members.
Eskom is struggling with tight supplies and wants to keep a lid on its own costs as it increases rates and seeks to build new plants to avoid power crunches. (editing by Elizabeth Piper)