UPDATE 1-China eyes stake in Australia's Fortescue-paper

(Adds Fortescue comment)

SYDNEY, Feb 4 (Reuters) - Australia's Fortescue Metals Group Ltd (FMG.AX: Quote, Profile, Research, Stock Buzz) said on Monday it has had talks with potential investors, as a newspaper reported that a Chinese sovereign fund and a mining company were seeking a stake.

The iron ore prospector said none of the talks had reached conclusions. It did not give further details.

The South China Morning Post newspaper said on Monday that China Investment Corp, a US$200 billion sovereign wealth fund, and China Shenhua Group, the country's largest coal mining firm, were in informal talks to buy a 15.85 percent stake in Fortescue for about US$2 billion.

Fortescue shares surged as much as 14.5 percent on the report, and were last trading up 11 percent at A$7.22

The report comes after state-owned Aluminum Corp of China (Chinalco) teamed up with U.S. aluminium producer Alcoa (AA.N: Quote, Profile, Research, Stock Buzz) to buy a $14 billion stake in global miner Rio Tinto Ltd (RIO.AX: Quote, Profile, Research, Stock Buzz), potentially derailing efforts by BHP Billiton Ltd (BHP.AX: Quote, Profile, Research, Stock Buzz) to take control of Rio.

The white-hot market for iron ore, fuelled by dramatic increases in Chinese steelmaking amid a boom in the world's fourth-biggest economy, is unlikely to cool before the middle of the next decade, analysts believe.

The Chinese government has been encouraging the use of the country's huge foreign exchange reserves to secure access to resources overseas and boost China's global economic clout.

In November Fortescue denied media speculation a Chinese company would take a stake in it. The Australian company is trying to become the third big iron ore miner in the ore-rich Pilbara region of western Australia, behind Rio and BHP Billiton.

It has completed about 75 percent of the construction of an Indian Ocean port for the mining project, and is scheduled to begin shipping iron ore in May. (Reporting by Jonathan Standing)