* Investment Canada backs Potash bid - report
* Conditions may involve billions in infrastructure spend
* BHP stock steady; Ottawa decision due by 0400 GMT on Nov 4
* BHP expected to raise its offer after govt approvals
* Miner may walk if conditions too onerous - investors (Refiles to add WRAPUP tag)
By Michael Smith and David Ljunggren
SYDNEY/OTTAWA, Nov 2 (Reuters) - Canada is set to approve BHP Billiton's (BHP.AX) $39 billion bid for Potash Corp POT.TO this week, a newspaper reported, but it might impose tough conditions which could threaten the world's biggest deal this year.
Canada's National Post said Investment Canada officials had recommended Ottawa allow the world's largest miner to proceed with its hostile offer, but only on condition that BHP BLT.L spend billions of dollars on new infrastructure in Canada.
The newspaper did not detail the infrastructure commitments that would be sought, but it quoted political insiders as saying the investment agency had recommended a government-appointed task force be set up to monitor and enforce the takeover terms.
BHP Chief Executive Marius Kloppers is betting an increasingly hungry world will pay dearly for the hot commodity, marking the miner's entry into the global food industry.
Fund managers said any conditions requiring onerous new investments from BHP could mean the bidder baulks at raising its offer or even undermines the viability its current bid of $130 a share for Potash, the world's largest fertiliser producer.
"Yes, it could have some impact on BHP's ability to raise the bid," said Peter Chilton, a fund manager at Constellation Capital, which owns BHP shares.
For other BHP-Potash stories [ID:nN22340110]
SCENARIOS-What happens next with BHP's bid [ID:nN01156199]
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BHP/Potash timeline r.reuters.com/zew32q
"Expectations are running at $160 to $170 a share, which is a big price. It just depends on BHP's internal study on the prospects for the commodity," Chilton said.
A spokeswoman from BHP declined to comment on the report.
Potash's U.S.-listed shares ended up 1.1 percent at $146.6, above the $130 a share offered by BHP. BHP's Australian-listed shares were little changed on Tuesday in a steady broader market.
Since BHP announced its bid in late August, Potash stock has held well above the offer price, which Potash has rejected as inadequate. Markets are betting that a higher bid would eventually materialise.
WHO HAS THE FINAL SAY?
The National Post, quoting insiders from the ruling Conservative Party, said Prime Minister Stephen Harper himself would have the final say on the deal.
Harper's office said Industry Minister Tony Clement, not the prime minister, would have the final say on the takeover. The decision is due by midnight on Nov. 3 (0400 GMT on Nov. 4).
By law, Ottawa must decide whether the bid would bring a net benefit to Canada as it makes its decision.
Canadian approval is likely to force BHP to decide whether to raise its $130-a-share offer.
Potash's home province of Saskatchewan opposes the takeover, so investors expect Ottawa to try and appease the province by demanding tough conditions from BHP. Saskatchewan is a political stronghold for Harper's minority Conservative government.
"The politicians need to do something to save face. It would not surprise me if there were more biting concessions," one source familiar with the transaction said.
BHP has not ruled out raising its offer, but a source familiar with the situation told Reuters it was unlikely to do so while it awaited Ottawa's decision. There is no competing bid.
This weekend, London's Sunday Times reported that BHP would raise its offer by 10 percent [ID:nLDE69U08P] but a recent Reuters poll of investors showed the offer would need to be raised much higher still, to well above $150 a share. (Additional reporting by Pav Jordan in Toronto; Narayanan Narayanan Somasundaram in Sydney; Raji Menon, Eric Onstad and David Ljunggren; Editing by Mark Bendeich and Anshuman Daga)