"OZ Minerals' Prominent Hill mining operations are situated in the Woomera Prohibited Area in South Australia," Treasurer Wayne Swan said in a statement.

"The Woomera Prohibited Area weapons testing range makes a unique and sensitive contribution to Australia's national defence."

Swan said it was "not unusual for governments to restrict access to sensitive areas on national security grounds," adding that talks were continuing between Minmetals and Australia's Foreign Investment Review Board.

The government would consider alternative proposals relating to the Australian miner's other businesses and assets, he said.

Australian Foreign Minister Stephen Smith, who held talks with his Chinese counterpart Yang Jiechi in Beijing Friday, defended the decision while maintaining his nation was open to foreign investment.

"We encourage overseas foreign investment, capital investment in Australia that is one of the things that the whole of Australia's economy is built on," Smith told journalists.

"But from time to time a difficult context passes and we are faced with having to make a decision in the national interest."

Smith said he did not specifically discuss the Minmetals deal with Yang.

Prominent Hill, a copper-gold mine, is OZ Minerals' flagship project. The company has warned that it risks being placed in receivership if the takeover bid fails.

OZ Minerals chief executive Andrew Michelmore said in a statement the company would make an announcement as soon as possible about a potentially changed bid.

The company remains in "constructive" talks with its banks regarding the extension of loan facilities, he said. It needs to extend 1.1 billion Australian dollars in loans due by the end of the month.

A spokesman for Minmetals said the firm "remains in discussions" with the Foreign Investment Review Board and is focused on "delivering an agreed solution to OZ Minerals".

The government had on Monday postponed an expected decision on the deal, after a similar move last week on Chinese-owned Chinalco's proposed 19.5-billion-US-dollar investment in mining giant Rio Tinto.

The postponements came amid intense debate over whether Australia should allow Chinese state-owned entities to increase their control over its resource base.

Canberra's ruling on OZ Minerals is expected to encourage speculation that the government will take an equally tough line when it rules on the Rio bid.

-- Dow Jones Newswires contributed to this report --

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Sydney (AFP) May 2, 2009
Anglo-Australian mining giant Rio Tinto and its Chinese state-owned suitor, Chinalco, have promoted their 19.5 billion US dollar tie-up to the Australian government as beneficial for both nations.