In a sign of wavering investor confidence, Rio's shares hit a low of 46.96 dollars in early afternoon trade on the Australian Stock Exchange, before paring back slightly to close down 8.7 percent at 47.50.

The slump reflected a 5.7 percent fall in London overnight in a sell-off following Rio's appointment of British American Tobacco chief Jan du Plessis as its new chairman.

Du Plessis is taking the helm at a critical time for the debt-laden miner, which is pressing the 19.5-billion-dollar tie-up with Chinalco.

Under the deal, currently under review by Australia's foreign investments board, China's state-owned aluminium producer would double its stake in Rio to 18 percent.

However, the Australian government Monday delayed by 90 days a decision on whether to approve the Chinalco investment amid growing concern over foreign ownership in the key mining sector.

The proposal has unsettled shareholders and lawmakers. Opposition senator Barnaby Joyce took out a series of television advertisements saying that "the Australian government would never be allowed to buy a mine in China.

"So why would we allow the Chinese government to buy and control a key asset in our country?" he asked.

Joyce successfully moved Wednesday for the Senate Economics Committee to investigate foreign acquisitions by state-owned overseas companies, including the proposed Rio-Chinalco deal.

"One of the other concerns we have with the People's Republic of China is our recourse if things become unhinged, becomes not a corporate issue, but a diplomatic issue," he told the Senate.

The committee is due to report mid year.

An independent senator, Nick Xenophon, also voiced his opposition, telling state radio Wednesday that "I think we should be selling the milk not the cow, and in this case, the minerals not the mine."

"Opposition to the Chinalco deal is growing," said IG Markets analyst Ben Potter.

"The issue is going to become quite contentious here for a while before the Foreign Investment Review Board comes up with their decision."

Goldman Sachs JBWere said there appeared to be a growing risk that the Chinalco deal would be scuttled.

"As much as we don't like the Chinalco deal, if it's not approved now, and without an attractive alternative, we would see this as negative for the share price," it said in a market note.

Dealers said the uncertainty over Chinalco could weigh on Rio's shares for months, with investors likely to view it as "dead money" during the foreign review process.

Investors were also spooked by the prospect of a discounted rights issue to raise capital if the deal was rejected, analysts said.

"If they do a rights issue, that's obviously dilutive, and the increased risk of that is why the stock's coming off," said Patersons Securities' Chris Blair.

Rio warned last month that 2,000 Australian jobs could be at risk if the deal does not receive regulatory approval.

Its prospects suffered a further hit Wednesday when the World Bank slashed China's 2009 growth forecast from 7.5 percent to 6.5 percent, noting that its exports had suffered as the global financial crisis intensified.

Rio chief executive Tom Albanese has closely aligned its fate with that of China, saying that all projects and near-term capital expenditure would be continuously reassessed in light of demand from the Asian giant.

--Dow Jones Newswires contributed to this report--

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