* Rio says BHP deal was discussed during Oct 4 board meeting
* Sydney Morning Herald said Rio was planning to end deal
* Rio's London-listed shares close up 2.6 percent
* BHP Billiton up 2.4 percent, both in line with UK sector
(Releads with Rio statement, updates share prices)
By Eric Onstad
LONDON, Oct 5 (Reuters) - Mining group Rio Tinto has made no decision on its planned $116 billion Australian joint venture with BHP Billiton, it said on Tuesday after a report said the deal could be terminated.
"The Rio Tinto board has not made any final decisions about possible outcomes or next steps relating to the proposed Rio Tinto/BHP Billiton iron ore production joint venture in western Australia," Rio said in a statement.
The Sydney Morning Herald earlier said Rio was preparing to walk away from the deal and cited sources close to the Rio board saying the company was preparing to inform BHP of its decision.
"The major reasons for Rio's decision appear to be its improving financial fortunes, pressure from shareholders and the conclusion that the deal favoured BHP," the paper's website said. It added Rio Chairman Jan du Plessis informed fellow directors on Monday he did not think BHP would object to Rio ending the deal.
Rio said the BHP deal had been discussed during a board meeting on Oct. 4. "The board acknowledged recent communications from regulators that indicate potential obstacles to achieving clearance for the joint venture," Rio said in its statement.
Rio's London-listed shares closed up 2.6 percent while BHP Billiton rose 2.4 percent, in line with a stronger British mining index.
Some shareholders of Rio -- the world's second largest iron ore miner -- have complained that BHP should pay more than the agreed $5.8 billion to Rio as part of the JV, which envisages a 50-50 partnership. The payment accounts for the fact that Rio is bigger in iron ore than BHP.
EXPANSION PLANS
Rio is expected to announce in coming months long-term plans to expand its iron ore output by about 50 percent to 330 million tonnes a year, said analyst Charles Kernot at Evolution Securities in London.
"If they have a deal with BHP, some of that upside potential gets diluted, it doesn't all accrue to Rio shareholders. The more work that the company does on it, perhaps the more value they'll think they're giving away, unless they can convince BHP to pay more for the equalisation payment," Kernot said.
If the joint venture fails, investors would regard it as positive for Rio and negative for BHP, analyst Tony Robson at BMO Capital Markets said in a note.
"On current iron ore prices, the $5.8 billion that would have been received by Rio from BHP for the JV appears well below fair value for the tonnage involved," he said.
The deal was agreed during the global downturn when Rio was struggling to cut its debt burden, but now both companies are enjoying healthy cash flows from buoyant metals prices.
Eric Finlayson, head of exploration at Rio, declined to answer questions about the joint venture after a presentation about iron ore at a conference in London. The JV was not mentioned in the presentation, including its section on expansion plans.
The two firms have been awaiting approval from competition regulators in Europe, Australia and Asia since last December. Both companies' chief executives have said they remained committed to the JV, since merging their operations will achieve more than $10 billion in synergy savings.
But they have expressed frustration at the long delay in getting regulatory approval. Australia's competition regulator said on Sept. 15 it had again delayed its decision at the request of the companies.
Under the JV, regulatory approvals and a final agreement must be completed by the end of the year. (Additional reporting by Sarah McFarlane, Jon Loades-Carter and Sudip Kar-Gupta; Editing by Will Waterman and David Holmes)