* Treasurer: Australia welcomes foreign investment
* Treasurer Swan says investment has to be in national interest
* Details of ASX/SGX deal decision to be released later
* ASX shares flat, SGX edges higher
* SGX to await FIRB recommendation on bid (Adds comment on FIRB, pitfalls of cross-border deals in Asia, updates share price)
By Michael Smith and Rachel Armstrong
SYDNEY/SINGAPORE, April 6 (Reuters) - Australia defended its preliminary decision to block Singapore Exchange's $7.8 billion bid for Australia's ASX Ltd , but criticism is growing that the decision could hurt future foreign investment in the country.
Treasurer Wayne Swan, speaking a day after saying he intended to block the deal on unspecified national-interest grounds, said Australia continued to welcome foreign investment and described the approval process as fair and transparent.
"I welcome foreign investment, but ultimately all foreign investment proposals have to be in the national interest," he told ABC radio on Wednesday.
Swan declined to spell out his reasons for initially blocking the deal, which was agreed by the two exchanges to cut costs, combat alternative trading platforms and avoid being overtaken by North American and European exchange mergers.
Critics however, have jumped on the decision as a case of politics trumping business.
"This rhetoric walks on a thin political line and may be deemed to be pandering to sectors of the electorate," said Krishna Ramachandra, managing director of law firm Duane Morris & Selvam in Singapore.
Australia has gained a reputation as a sometimes-fickle recipient of foreign capital in recent years, despite the fact it runs a chronic current-account deficit and needs foreign investment to develop its huge resources sector.
"This deal would have added significant strategic positioning for outbound Australian investments, so much work now needs to be done by the Australian administration to manage this fallout and more importantly, to restore its foreign direct investment credentials with international investors," said Ramachandra.
DEAL ALL BUT DEAD
Sources said SGX expected to talk to the Foreign Investment Review Board before the board made its final recommendation on April 11. SGX had no plans to withdraw its bid before then, said the sources, who were not authorised to talk publicly about the deal.
"If there is a door open, Magnus will go for that door," one source said, referring to SGX Chief Executive Magnus Bocker.
However investors believe the deal is all but dead, with the SGX saying it had no current plans to amend its ASX bid.
"The announcement yesterday clearly takes the deal off the table," said Matthew Williams, Australian equities manager at Perpetual Investments , ASX's top shareholder, with a 4.9 percent stake, according to Thomson Reuters data.
The Singapore government's indirect 23 percent stake in SGX is seen as the main stumbling block to Australian regulatory and political approval.
Australia's foreign-investment approval process has been criticised for decades as being opaque and unpredictable, but two clear trends have emerged: the vast majority of applications are uncontentious and approved, but problems are likely to arise when state-linked investors look to take control of a strategic business.
In 2009, China Non-Ferrous Metal Mining Co was blocked from buying a controlling stake in rare earths miner Lynas Corp . Australia also blocked state-linked China's Minmetals bid for OZ Minerals , saying its Prominent Hill mine was too close to a rocket testing range.
Robert Tobias, an M&A lawyer at DLA Phillips Fox in Sydney, said he did not see any major fallout for foreign M&A in Australia.
"Unless there's something extraordinary about your deal I don't see why they wouldn't be approved in the normal course," he said. "The stock exchange is not classified as a sensitive industry under the foreign investment guidelines, but clearly it is a sensitive institution in the Australian context and that clearly had an impact on the government's thinking."
FINANCIAL SECTOR DEALS FACE HEADWINDS
But while Australia may not be closed to foreign investment, the decision may heighten concerns about the difficulties in getting cross-border financial services deals approved in the Asia-Pacific region.
"We've seen a number of headwinds in relation to cross-border financial services M&A since the financial crisis," said Roger Denny, head of M&A for Asia at law firm Clifford Chance.
Other deals that have been blocked in the region in the past year include American International Group's proposed sale of its Taiwan insurance arm Nan Shan to Hong Kong's Primus Financial Holdings and National Australia Bank's proposed takeover of AXA Asia Pacific .
"There have been increasing concerns since the financial crisis about protectionism and greater scrutiny from financial regulators," said Denny.
This may worry the region's exchanges, eyeing the flurry of trans-atlantic bourse consolidation, that they could get left behind.
The London Stock Exchange is proposing to take over
Toronto Stock Exchange owner TMX Group , while NYSE
Euronext has received two bids - one from Deutsche
Boerse
In Australia, the ASX also faces competition later this year from a new trading platform in due to be launched by Nomura's Chi-X.
ASX shares were flat on Wednesday at A$33.75 following a 3.3 percent drop on Tuesday after SGX and ASX said the deal was about to be blocked by Swan. SGX shares edged up 0.8 percent after a 4.5 percent rise on Tuesday. (Additional reporting by Sonali Paul in Melbourne, Mark Bendeich in Sydney; Editing by Balazs Koranyi and Matt Driskill)