The stock slumped 11.72 percent to close at 57.60 dollars, tracking similar falls in London overnight as investor anxiety grew that Rio could scrap the proposal in favour of a rights issue.

"The Chinalco deal was a desperate and shortsighted deal when the credit and equity markets were frozen," said Southern Cross Equities director Charlie Aitken.

"Today Rio has a variety of refinancing options and they should use them, even if that means annoying their largest customer (China)," he added.

Under the deal, which is currently being reviewed by Canberra, Chinalco would double its investment in Rio to 18 percent, taking two seats on the Rio board and stakes in its aluminium, bauxite, copper and iron ore projects.

The proposal, China's largest ever foreign investment, has come under fire in Australia amid increasing sensitivity about Beijing's quest to secure a firmer hold on natural resources around the globe.

Aitken said the Rio fears were dragging on the resources sector as a whole, with rival BHP Billiton off 6.19 percent to 32.30.

Trade Minister Simon Crean moved to quell fears that consideration of the Chinalco deal would impact stalled free trade negotiations with Beijing.

"We have made no link between the FTA and the Chinalco deal, and neither have they," Crean told reporters. "They accept, importantly, we're not making a link and I accept that they're not."

"I have assured them that we are open to foreign investment, we don't apply discriminatory procedures country by country, but that we do require that significant proposals be subject to a national interest test under Foreign Investment and Review Board guidelines," he added.

Crean said the stalled talks would not go ahead until there was a "solid indication about seriousness moving forward," and though the Chinalco deal had made things more difficult, it was "not impossible".

"It is quite incredible the economic activity taking place on the ground in the regions of China ... there are huge opportunities for commercial partnerships," said Crean.

"China for us is the place to be. We need a bigger slice of the action and we are well positioned."

Canberra will make a decision in mid-June on whether the tie-up can go ahead.

Rio has said it "represents the optimum combination of new capital, raised at premium prices, with ongoing benefits through a pioneering strategic partnership."

The capital injection would "immediately" strengthen Australia's economy and the broader Sino-Australian relationship, Rio told a senate committee into investment by foreign state-owned entities this month.

Chinalco would not be able to exercise control over Rio's assets, nor could it manipulate commodities prices to China's advantage, it said.

Australia recently gave the green light to Minmetals of China for a 850 US million dollar takeover of debt-laden OZ Minerals.

And Hunan Valin Iron & Steel Group was allowed to increase its stake in iron ore miner Fortescue Metals Group to up to 17.55 percent, by investing more than one billion dollars.

--Dow Jones Newswires contributed to this report --

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