Rio Tinto rejected an all-share approach from the rival BHP Billiton today that would have created a mining giant worth $350 billion (£166.1 billion)

BHP Billiton's approach follows today's formal completion of Rio Tinto's $40 billion takeover of Alcan, the Canadian aluminium producer.

BHP had been waiting for the Alcan deal to complete before making its move.

Rio disclosed today that BHP had proposed paying three of its own shares for every Rio Tinto share.

BHP's price dropped 80p by mid-afternoon to £16.76, valuing Rio shares at £50.28 against a market price of £53.26, up almost £10 on the day.

Analysts speculated that the terms could rise to £55 per Rio Tinto share, valuing the third-largest miner behind BHP and Anglo American at £55 billion.

After the announcement from BHP confirming its approach, Rio Tinto immediately rejected the offer as significantly undervaluing the group.

Rio said in a formal statement: "The boards of Rio Tinto have given the proposal careful consideration and concluded that it significantly undervalues Rio Tinto and its prospects.

"Accordingly, the boards have unanimously rejected the proposal as not being in the best interests of shareholders."

BHP said that it had recently written to the board of Rio Tinto outlining a proposal in relation to a potential combination with Rio Tinto on terms incorporating a premium, reflecting its confidence in the benefits for both sets of shareholders of such a transaction.

"In preparing its proposal, BHP Billiton has examined in detail the regulatory issues and other practicalities of a combination.

"In its letter, BHP Billiton sought to pursue discussions with Rio Tinto regarding its proposal. Rio Tinto rejected the proposal."

The company added: "BHP Billiton has again written to Rio Tinto and intends to continue to seek an opportunity to meet and discuss its proposal with Rio Tinto.

"There can be no assurance that any transaction or offer will result from BHP Billiton's proposal."

Brian Gilbertson, the former BHP chief executive, attempted to launch a bid for Rio in 2003, but the move was vetoed by Don Argus, the BHP chairman.

Mr Gilbertson left soon after the proposal.

Industry sources suggested today that Mr Argus was now in favour of a takeover because BHP has grown faster than its rival during the past five years.

A spokesman for BHP declined to comment on whether the company would now make a hostile bid for Rio or consider offering cash for the group instead of its three-for-one all-share deal.

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