India may auction diamond mine abandoned by Rio Tinto

* Bunder mine may also be given to state company - agency

* Mines agency says will talk to parties interested in Bunder (Adds details about spending, environmental issues)

By Krishna N. Das (Other OTC: DASX - news) and Sankalp Phartiyal

NEW DELHI, Aug 30 (Reuters) - India will auction a diamond project that global miner Rio Tinto (LSE: RIO.L - news) is abandoning, or allocate it to a state firm, the mines secretary said on Tuesday, adding that the government would move fast to tap the resource.

The Bunder deposit, about 500 km (300 miles) southeast of New Delhi and discovered by Rio Tinto in 2004, is estimated to contain about 27.4 million carats of diamonds potentially worth billions of dollars.

But Rio Tinto said this month it would pull out of the project by the end of the year to conserve cash and cut costs. A spokesman for the company said it has spent around $90 million on Bunder over the past 14 years and that total investment planned had been $500 million.

In early August, the company reported a 47 percent slump in first-half profit to its weakest in 12 years and underlined the importance of cost-cutting.

Mines Secretary Balvinder Kumar told Reuters the withdrawal was a surprise as the company was close to getting a forest clearance for the mine from the environment ministry.

Rio Tinto's decision came at a time when the government was seeking the help of it and its rivals, such as Anglo American (LSE: AAL.L - news) , to explore for diamonds and gold to make India a major mineral producer.

"It's a commercial decision taken by their headquarters in which we could have not done anything," said Kumar, who has been briefed by Rio Tinto India management on the exit.

"Bunder is one of the best deposits in India and we would like to make sure that it is tapped."

Kumar said he would talk to parties interested in Bunder when Rio Tinto formally hands the project back to the state government of Madhya Pradesh, where it is located.

Rio Tinto has said the company would work with the government on the future of Bunder and was "looking at options for a third-party investor to carry forward the development of the project".

Kumar, however, said as the Bunder deposit is located in a forested area important to tiger and other wildlife habitats, fresh environmental permissions maybe required for the next operator and that could be a challenge. (Reporting by Krishna N. Das and Sankalp Phartiyal; Editing by Robert Birsel and Louise Heavens)