SYDNEY, Oct 1, 2008 (AFP) - Australia's competition watchdog said Wednesday it will not oppose BHP Billiton's 120 billion US dollar takeover bid for rival Rio Tinto, saying the deal was unlikely to substantially lessen competition.

The hostile bid for Rio by the world's largest miner has created concerns around the globe -- including in major resources market China -- that the mega-miner would have too much control over prices and supply.

The Australian Competition and Consumer Commission (ACCC) said the bid to merge the Anglo-Australian mining giants would create a significant global supplier of iron ore, coal, bauxite, alumina, copper and uranium.

'In particular, the proposed acquisition would combine two of the three major global suppliers of iron ore,' chairman Graeme Samuel said.

But he added: 'While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market.'

The ACCC's decision comes ahead of that of the European Commission, which is due by January 15, and follows US regulators move in July to close their review of the deal without raising any competition concerns.

BHP Billiton's bid for Rio Tinto, the world's third largest miner, was announced in February and offers 3.4 BHP shares for every Rio share.

Rio Tinto has repeatedly rejected the offer, saying it greatly undervalues the company as both firms enjoy huge demand for their raw materials from rapidly industrialising Asia.

BHP Billiton has argued that by merging, the two firms could 'help meet the developing economies' demand for resources better and faster than the two companies do apart.'

It welcomed the decision, saying the company believed the merger would benefit the customers of both groups.

'Our strategic rationale has always been based on the combined company having an incentive to produce more product, more quickly, to deliver to customers,' chief commercial officer Alberto Calderon said in a statement.

Rio Tinto said the takeover had still not received the green light from all regulators including in Europe, Canada and South Africa.

'It's still too early to know what the outcome of the regulatory process would be,' a spokesman told Dow Jones Newswires.

Yet the news boosted Rio Tinto's Australian shares, which had been weighed down in recent weeks by concerns that regulators would block the merger, and led the local market higher.

Rio Tinto shares closed up 12.4 percent at 95.00 dollars while BHP Billiton stock gained 5.7 percent at 32.75 dollars.

But head of trading at Shaw Stockbroking Jamie Spiteri said while the ACCC decision helped the stocks, the real clincher would be in Europe.

'The BHP/Rio situation was aided by the ACCC's comments, but larger and more influential regulatory bodies are the ones that are going to decide the outcome,' he said.

'Not only is the EU regulator going to dominate, but Rio shareholders abroad are going to influence the decision.'

In a preliminary statement released in August, the ACCC identified the supply of iron ore as a potential concern if the merger went ahead because it would see two of the three major global seaborne suppliers combine.

But Samuel said Wednesday that high demand for iron ore had seen significant expansion in the market despite the huge costs of entering it.

The merged firm would also be unlikely to limit its iron ore supply 'given the uncertainty it would face in relation to the profitability of this strategy', he said.