UPDATE 4-Xstrata ditches Lonmin bid but blocks rivals

(Adds Xstrata ups Lonmin stake, more analyst comment)

By Eric Onstad

LONDON, Oct 1 (Reuters) - Anglo-Swiss miner Xstrata Plc (XTA.L) dropped immediate plans for a $10 billion bid for No. 3 platinum producer Lonmin Plc (LMI.L) on Wednesday but set the scene for a later deal by scooping up Lonmin shares as they fell.

Xstrata, the world's fifth biggest mining group by market value, said financial turmoil and difficult debt terms were behind the decision, but it increased its stake in Lonmin to 24.9 percent, making a rival bid very unlikely.

"Xstrata are not walking away, but have effectively locked out a competing bid at an attractive average-in price for their stake," analyst Michael Rawlinson of Liberum Capital said.

Xstrata, which already had a 10.7 percent Lonmin stake, bought 22.2 million shares at an average of 19.79 pounds each, well under its initial proposed offer of 33 pounds per share unveiled on Aug. 6.

Xstrata built up its stake to the maximum allowed under UK takeover rules, which stipulate it cannot make a formal bid for Lonmin for six months unless it is agreed by the company.

After 12 months Xstrata is free to make a bid lower than the 33-pound-per-share proposed bid.

Lonmin's shares, which had already shed a third since Xstrata made its approach tumbled as much as 30 percent and were trading 16.6 percent weaker at 18.96 pounds by 1137 GMT.

Xstrata shares, which had lost 46 percent since it made the approach, surged 7.6 percent to 18.46 pounds, compared to a 3.9 percent increase in the UK mining index .FTNMX1770.

SIGNIFICANT RISKS

Xstrata said it passed up on making a formal bid due to the current chaos in financial markets.

"The current lack of clarity and certainty regarding the future availability of credit introduces significant risks into the financing package available to Xstrata," Chief Executive Mick Davis said in a statement.

Xstrata said loan terms required it to refinance a substantial portion of the debt within 12 months.

"Finalising the bank debt necessary to implement the offer on those terms would not be in the best interest of Xstrata. As a result, Xstrata has no current intention to make an offer for Lonmin."