Petra Diamonds suspends work at Tanzanian mine after diamonds seizure

* Petra says no formal reason for govt seizure of diamonds

* Shares (Berlin: DI6.BE - news) touch lowest since December 2015

* Williamson mine employs 1,400 workers (Updates share price, adds analyst, detail)

Sept 11 (Reuters) - Petra Diamonds (Frankfurt: 908093 - news) halted operations at its Williamson mine in Tanzania after the government seized a consignment of diamonds and questioned employees as part of an investigation into the country's mining industry.

Following the seizure, operations at the mine temporarily have been stopped for safety and security reasons, Petra said.

Shares in the London-listed company were down 8 percent at 82.65 pence at 1318 GMT, having dropped earlier in the session by 28 percent to its lowest level in 21 months.

Petra is the latest miner caught up in a government challenge to the industry, which it accuses of not giving the government a fair share of Tanzania's mineral wealth. Mining accounts for about 4 percent of Tanzania's GDP.

The diamonds were seized at the main airport in Tanzania's commercial capital Dar Es Salaam on Aug. 31 as they were being exported to Antwerp, Belgium.

The Tanzanian government said on Saturday (Shenzhen: 002291.SZ - news) it planned to nationalise the diamonds, whose value it put at $29.5 million, after it accused the miner of under-declaring its mineral exports.

Tanzanian President John Magufuli last week ordered a review of a Petra contract and asked public officials to resign over the outcome of an investigation into the mining sector.

Magufuli, nicknamed "The Bulldozer" for the way he drove through his policies as a government minister, also said he had ordered law enforcement agencies to investigate allegations of under-declared diamond exports.

Tanzania has passed new laws to increase mining taxes, to force companies to renegotiate their contracts and to allow the state to own up to 50 percent of shares in mining companies.

Tanzania's biggest gold miner, Acacia Mining (Frankfurt: 33A.F - news) , said last week that it would stop underground work at its flagship mine. It has also had its gold shipments stopped and employees questioned.

A parliamentary committee said on Thursday there were "gross irregularities" in the manner in which the Tanzanian government reduced its shareholding in Williamson Diamonds Ltd from an initial 50 percent to the current 25 percent.

The remaining 75 percent is owned by Petra.

The mine contributed 18 percent of Petra's revenues in 2016 and employs 1,400 workers.

The company said it had not been told the reason for the action, adding that it conducted all operations related to the Williamson mine in a "transparent manner" and in full compliance with legislation.

Bank of America Merrill Lynch said the mine was worth just 3 percent of Petra's estimated net present value and 6 percent of estimated 2017 production.

"Whilst extreme rhetoric and unreasonable claims are not out of the question, we see the government’s 25 percent ownership as helping to mitigate the risks somewhat," said Bank of America (Swiss: BAC-USD.SW - news) Merrill Lynch, adding that the share price reaction was overdone.

"Given Tanzania's history of improbable accusations against Acacia, we’d be backing Petra’s side of the story, not that it will help them," Investec (LSE: INVP.L - news) said. (Reporting by Arathy S Nair in Bengaluru and Zandi Shabalala in London; Editing by Louise Heavens, Greg Mahlich)