UPDATE 1-Sinosteel has 33 pct of Midwest, moves to stop rival

(Adds takeover panel, Murchison comment)

By James Thornhill and Tom Miles

SYDNEY/HONG KONG, June 5 (Reuters) - Chinese metals trader Sinosteel owns one-third of takeover target Midwest Corp MIS.AX and has made a legal move to stop its rivals buying any more shares in the Australian iron ore prospector.

Sinosteel is competing with Murchison Metals Ltd (MMX.AX) for control of Midwest and said in a regulatory filing on Thursday it had increased its voting stake to 33.82 percent, up from 28.37 percent the previous day.

Murchison, backed by its main shareholder, U.S. hedge fund Harbinger Capital, has proposed a merger with Midwest, throwing down a challenge to Sinosteel's takeover.

Australia's Takeovers Panel, which earlier this year forced a Chinese steelmaker to cancel a purchase of a stake in another Australian miner, said Sinosteel had asked it to stop Murchison and Harbinger from buying any more Midwest shares until they received approval under the Foreign Acquisitions and Takeovers Act (FATA).

The Takeovers Panel said Sinosteel had complained that Harbinger's acquisition of Midwest shares breached FATA and that Harbinger and Murchison were acting as associates and had not made adequate declarations about their shareholdings in Midwest.

Sinosteel requested that any shares acquired in breach of FATA be handed to the Australian Securities and Investments Commission and sold.

Earlier this year a complaint to the Takeovers Panel forced Chinese steelmaker Shougang to drop its plans to invest in Mount Gibson Iron Ore Ltd (MGX.AX) because two of its subsidiaries had stakes totalling more than 20 percent, which should have triggered a takeover announcement.

The regulatory body said it had not yet decided whether to consider the Midwest case, as requested by Sinosteel.

TUG-OF-WAR

Harbinger has built an 8.1 percent stake in Midwest, helping to keep its share price above Sinosteel's offer of A$6.38 per share. Sinosteel's attempt to block Harbinger from buying any more could weaken the share price and make its own offer look attractive.

Midwest's shares were 4 percent lower at A$6.46 by 0232 GMT, down 27 cents on the day and a mere 8 cents above the Sinosteel offer price, which it has said is final.

Murchison's shares were down 9 percent at A$3.74, hammering its all-stock merger plan to an implied value of about A$6.51 per Midwest share, compared with A$7.17 when it was announced last month.

Murchison said it understood Sinosteel had increased its Midwest holdings to as much as 28 percent on Wednesday by buying from a single shareholder.

"While we are obviously disappointed that a major Midwest shareholder has chosen to accept Sinosteel's offer at substantially below the prevailing market price, as far as we are concerned, we are full steam ahead on the implementation of the merger," Murchison Chairman Paul Kopejtka said in a statement.

"There remains compelling strategic and financial logic to the merger proposal."

Murchison, with the backing of Japan's Mitsubishi Corp (8058.T), says its aim is to build the merged company into the main producer in the Yilgarn region of Western Australia, which could be transformed into a major iron ore province by a planned new railway and port.

Sinosteel also expects the region to flourish and wants Midwest to lead its development.

Analysts say the idea of a tie-up between Midwest and Murchison makes perfect sense because of their shared infrastructure and adjacent projects, and even if Sinosteel's bid succeeds, the Chinese company is likely to want Murchison as well.

For more analysis on Sinosteel's position, please click on [ID:nHKG339774] ($1=A$1.04)

(Reporting by James Thornhill and Tom Miles; Editing by Ken Wills)