Rio Tinto's dispute with the Mongolian government has intensified after the mining giant said it would sack up to 1,700 mostly local workers.
The move follows Rio's suspension of the $US5 billion underground expansion of the Oyu Tolgoi copper and gold mine a fortnight ago.
The trigger for the halt on work was the government - a 34 per cent partner in the project - refusing to approve Rio's proposed financing plans with banks for the expansion, amid complaints about cost blow-outs.
The two parties have been engaged in ongoing disagreements about what share of profit the government would get and Rio's latest move is seen as aimed to pressure the government.
Rio Tinto released a statement saying it was a difficult time for everyone at Oyu Tolgoi, especially those losing their jobs.
"The shareholders are fully committed to resolving the issues so the underground development can resume, and in the meantime we remain focused on ensuring the continued safety and well-being of our workforce," a spokesman said.
The Gobi Desert project, one of the world's richest copper deposits, employs 11,000 people and is crucial to the resource-rich country, with its undeveloped economy and high poverty levels.
The International Monetary Fund estimates Oyu Tolgoi will increase Mongolia's GDP by 35 per cent once fully operational and represent one-third of it.
Some Mongolian politicians and members of non-government organisations are angry, accusing Rio Tinto of cheating it out of money.
The government is also in debt to Rio Tinto, borrowing $800 million and interest from the miner to pay for its 34 per cent stake.
Chief executive Sam Walsh described Oyu Tolgoi as a hugely complex and very involving project last week.
He defended Rio's contribution to Mongolia's economy, saying it had paid $280 million in tax last year, having only begun copper shipments out of the mine last month.
"We need to work through some difficult issues together, I'm convinced that we are aligned with the government of Mongolia in finding the best way to take the project forward," he said.
"We did commence shipments of concentrate in July and that will generate further taxes and royalties for the government and people of Mongolia and that in itself is good news."
The project is also crucial for Rio Tinto, which must diversify its business and change its complete reliance on iron ore from Western Australia's Pilbara currently for profits.
Rio's shares were 51 cents weaker at 61.42 at 1515 AEST on Thursday.
