UPDATE 1-Australia's Kagara to announce big nickel upgrade

(Adds details, nickel price forecast)

SYDNEY, Sept 3 (Reuters) - Australian miner Kagara Ltd (KZL.AX) will announce a large increase in the size of its Lounge Lizard nickel deposit in west Australia later this week, a source familiar with the project said on Wednesday.

If confirmed, the upgrade is likely to add to mounting worries of a supply glut in the world nickel market which has contributed to a 60 percent decline in prices from last year's record peaks.

Kagara, which mines zinc and copper in eastern Australia, earlier on Wednesday requested a temporary halt to trading in its stock pending an announcement by Friday.

The request follows a "substantial drilling intersection" at the lode, according to the company.

Kagara has in the past denied the undeveloped Lounge Lizard deposit in the ore-rich Forrestania nickel belt could be sold to help fund construction of its big Admiral Bay zinc mine, estimated to cost more than A$1 billion ($830 million).

But it has also maintained that nickel did not represent a core commodity for the company.

Kagara bought the Lounge Lizard deposit from Lionore Mining International, now part of Russia's Norilsk Nickel (GMKN.MM) for A$25 million in December 2006.

The Admiral Bay deposit could yield 300,000 tonnes of zinc and 250,000 tonnes of lead a year once it is fully developed, according to Kagara, making it one of the world's largest of its kind.

The pending upgrade to the resource follows a large increase in another outback nickel lode by rival Western Areas NL (WSA.AX).

Western Areas on Tuesday doubled the size of the mineral resource at its Spotted Quoll nickel deposit, saying it holds over 75,000 tonnes of nickel, which is more than one-fifth of annual world consumption [nSYD225774].

The potential to yield more nickel comes as analysts predict a slew of closures in the sector in response to sagging prices for the stainless steel alloy, which are down around 60 percent from record highs above $51,000 a tonne ($23 a pound) 16 months ago.

Australia & New Zealand Bank senior commodities strategist Mark Pervan forecast nickel prices will average $8.10 a pound in the fourth quarter.

BHP Billiton Ltd (BHP.AX)(BLT.L) has shut down its 100,000 tonne per year Kalgoorlie smelter in Australia for four months of repairs.

Xstrata Plc (XTA.L) has suspended its Falcondo ferronickel operations in the Dominican Republic, while Australia's Minara Resources Ltd (MRE.AX) was deferring nickel expansion plans, with both citing high costs and low prices.

Kagara stock, which closed at A$3.17 on Tuesday, has largely been on a down trend since mid-May, when it peaked at A$5.88, hurt by declining zinc price MZN3. ($1=A$1.20) (Reporting by James Regan; Editing by James Thornhill)