Citi fails to win $270 mln order vs Mercuria in metals financing case

* Web of legal actions resulting from suspected fraud in China

* Citi, Mercuria caught in fallout from metals financing probe

* Judge says Mercuria does not have to pay Citi

By Eric Onstad

LONDON, May 22 (Reuters) - U.S. bank Citigroup Inc (NYSE: C - news) failed on Friday in a bid to win an order from a London court that would force trade house Mercuria to pay about $270 million in potential losses for metals financing deals in China hit by suspected fraud.

The complex case is one of a web of legal actions filed in the wake of a probe launched in May 2014 by Chinese authorities of suspected fraud at China's Qingdao port (HKSE: 6198.HK - news) , the world's seventh busiest, and nearby Penglai.

The alleged fraud is estimated to have stung Western banks and trading houses as well as local Asian banks for more than $3 billion in total.

Neither Citigroup nor Mercuria Energy Trading Ltd are accused of fraud, but have been caught in the fallout from the probe.

"Citi's tender of endorsed warehouse receipts was not good delivery of metal to Mercuria," High Court Judge Mr. Justice Phillips said in the judgment.

"Citi is therefore not entitled to judgment for the unpaid price of that metal."

China has been investigating whether private metals trading firm Decheng Mining and its related companies used fake warehouse receipts to obtain multiple loans secured against a single cargo of metal.

Mercuria held copper and aluminium in Chinese warehouses and agreed a series of deals that were effective loans from Citi using the metal as collateral.

Under the repurchasing agreements, or repos, Citi agreed to purchase metal from Mercuria before selling it back at a slightly higher price to include interest on the effective loans.

The two groups were in the midst of several repo deals when the potential fraud in China was uncovered in warehouses in both Qingdao and Penglai. Citi demanded early repayment of the repos and Mercuria refused.

Mercuria welcomed the judgment while Citi vowed to press on in its attempts to force payment from Mercuria.

"Although the Court ruled Citi is not entitled to repayment now, Citi will vigorously pursue compensation from Mercuria for failure to deliver or safeguard the metal once further facts are established," the U.S. group said in a statement.

The Chinese probe is ongoing and authorities have not allowed access to warehouses affected by the suspected fraud.

Citi and Mercuria had a close business relationship but turned on each other during a frantic several weeks after the suspected fraud was uncovered, seeking to shift financial responsibility onto each other, the court heard during hearings in December. (Editing by William Hardy)