* Australia govt sees synergies benefiting country
* China official quoted as threatening sanctions on BHP, Rio (Adds BHP, minister's comments)
SYDNEY, June 12 (Reuters) - Australia's government gave cautious support on Friday for BHP Billiton's and Rio Tinto's planned iron ore joint venture, as a newspaper reported that China had threatened sanctions against the two if the deal went ahead.
The venture, announced last week, has provoked an angry reaction in China where press commentaries voiced suspicions that Canberra quietly encouraged the deal as a way of sinking an alternative Chinese investment in Australia's biggest iron ore province.
But Australian Resources Minister Martin Ferguson said he saw benefits in the deal, assuming it would receive all the required regulatory approvals.
"I actually think the joint venture has synergies of benefit to Australia, in terms of improving productivity, which represents a better return on our natural resources to the Australian community," he told Australian radio.
Last week, Rio walked away from a planned $19.5 billion equity tie-up with China's state-owned Chinalco and instead outlined the iron-ore joint venture with BHP.
The proposed venture could be a threat to China, the world's biggest steel making country, as the combination of the world's second and third largest iron ore producers would leave only two main suppliers alongside Brazil's Vale.
Rio, BHP and Vale control about 70 percent of global iron ore trade, while China consumes more than half of globally traded iron ore.
In the face of this, China may impose trade sanctions against BHP and Rio if they carry out the merger without the approval of Chinese competition agencies, the Sydney Morning Herald newspaper said on Friday.
"According to China's anti-trust law, we can veto such a merger agreement if the concentration of overseas business operations will affect domestic market competition," Ma Yu, the director of the foreign investment department at the Ministry of Commerce, was quoted as saying in the report from Beijing.
The paper said China's new anti-trust law empowers it to block offshore deals, but enforcement mechanisms remain unclear.
BHP declined to comment on the report.
One analyst said that the tie-up need not worry the Chinese as BHP and Rio already operate joint ventures elsewhere.
"China's comments are misdirected given the synergies that exist between Rio and BHP in iron ore," said DJ Carmichael & Co mining analyst James Wilson.
"These two companies already cooperate in joint ventures, such as Escondida copper in Chile." BHP holds 57.5 percent and Rio 30 percent in the world's biggest copper mine, located in northern Chile's Atacama Desert.
BHP shares slipped 0.5 percent to A$38.08 on Friday, while Rio was up 1.4 percent at A$78.10 in a broader market up 0.35 percent.
Resources minister Ferguson also played down the threat of any sharp reaction from China.
"We will get through it. In the end, China needs our resources and Australia needs China."
"As we return to global growth, we are key to actually fuelling China's growth opportunities, and China is also key to our recovery," he said.
The BHP-Rio tie-up plan also comes as annual negotiations over the price of iron ore between suppliers and Chinese customers stall over Chinese demands for a bigger cut than the 33 percent Rio has agreed with Japanese and Korean buyers.
On Thursday, the head of the China Iron and Steel Association (CISA), which is leading China's price negotiations, said the group was ready to cut steel output and drop annual iron ore talks if negotiations failed.
In a separate report on Friday, investment bank Goldman Sachs JBWere sees contract iron ore prices rebounding 10 percent next year and spot prices firming as Chinese imports rise. (Reporting by James Regan and James Grubel; writing by Jonathan Standing; Editing by Lincoln Feast)