UPDATE 1-China's Yanzhou to buy Australia's Felix for $2.9b

* Yanzhou agrees buy Felix for $2.9 bln

* Deal comes amid strained ties between China and Australia

* Deal subject to Australia, China government approvals (Adds details)

By Denny Thomas

SYDNEY, Aug 13 (Reuters) - China's Yanzhou Coal Mining Co <1171.HK> has agreed to buy Australian coal miner Felix Resources Ltd for $2.9 billion, in a deal likely to throw the spotlight on strained investment ties between the two nations.

Thursday's announcement comes soon after Anglo-Australian Rio Tinto walked away from an agreed $19.5 billion tie-up with China's state-owned Chinalco, a decision that some Chinese critics blamed on Australian hostility to Chinese capital.

Yanzhou's proposed takeover of Felix is subject to regulatory approvals in Australia, including from the Foreign Investment Review Board which vets all foreign sovereign investments.

China's No. 4 coal producer by market value is offering A$18.00 per share cash, including special dividends, a 6.5 percent premium to Felix's last traded price.

Analysts expect the deal to boost Yanzhou's output by about 10 percent.

Trading in Yanzhou and Felix shares were halted this week as the two firms finalised the deal. Talks initially started last year, but there were differences over valuation.

UBS advised Yanzhou, while Felix was advised by Citigroup and Wilson HTM.

China's relentless pursuit of Australian resource companies comes despite the Australia government this year rejecting China's state-owned Minmetals bid for distressed miner OZ Minerals Ltd , forcing Minmetals to submit a revised bid.

But investment bankers say Yanzhou's acquisition of Felix is expected to win approval from Australia's Foreign Investment Review board as the assets of the mid-sized company are not strategic, bankers and analysts say.

If completed, Yanzhou's purchase of Felix would be China's largest purchase in Australia ever, and its third-largest cross-border deal this year, according to Thomson Reuters data.

So far this year, Chinese firms have invested about $2.2 billion in Australian energy and resources companies.

Chinese imports of coal more than doubled to around 48 million tonnes of coal in the first half of this year, to meet growing demand for steel and power production. Felix produced 4.8 million tonnes of coal in the year to June. ($1=A$1.20)

(Additional reporting by Joseph Chaney; Editing by Mark Bendeich) (Reporting by Denny Thomas; Editing by Mark Bendeich)