The deal was drafted just weeks before rival BHP Billiton dropped a hostile takeover bid due to the state of the global economy, The Weekend Australian newspaper said.

Citing a draft memo from Rio Tinto Australia's then-managing director Stephen Creese to the Foreign Investments Review Board (FIRB), the report said the deal involved Rio spinning off its iron ore operations.

"As outlined at our meeting, Robert (Rio) is discussing with Colleen (Chinalco) a confidential proposal that would see Colleen acquire 19.9 percent of Robert's demerged iron ore business and 40 to 45 percent of the remaining business," read the memo, to FIRB member Patrick Colmer.

Under the deal, which the report said was valued at up to 40 billion dollars, cash-strapped Rio would have demerged its iron ore operations into a separate company which would have been listed and headquartered in Australia.

Talks were well advanced when BHP dropped its hostile bid for Rio in November 2008, prompting Rio to withdraw its offer, the report said. Creese's memo to the FIRB was never sent.

Chinalco went on to make a controversial 19.5-billion-US-dollar bid to increase its stake in Rio, which was last June scuttled by the Anglo-Australian miner in favour of a 15.2 billion US dollar rights issue.

Diplomatic relations between Australia and Beijing foundered following the collapsed deal, which would have been China's biggest ever foreign investment.

Australian passport holder Stern Hu was last July detained in Shanghai with three of his Chinese colleagues on allegations of industrial espionage. His case is in now in the hands of prosecutors.

Rio last November signalled it remained interested in collaborating with Chinalco "on projects of mutual benefit" and called for "ever-deepening cooperation" between the two countries.

The miner appointed a managing director for its China operations on Friday, a move which chief Tom Albanese said "underlines the importance the company places on enhancing its relationship with China."