* Blocking stake, rather than buyout, most likely strategy (Adds comments from IFFCO, legal shares)

By Euan Rocha and Joseph Chaney

TORONTO/HONG KONG (Reuters) - Chinese officials haveordered state companies to meet investment bankers to exploreways to block BHP Billiton's $39 billion bid forPotash Corp, a source with direct knowledge of thematter said.

In response to the directive, Sinochem is holding meetingswith several banks, the source said on Friday, includingCitigroup, HSBC and Morgan Stanley.

The order from Beijing underscores the seriousness withwhich China is taking the potential BHP-Potash tie up and itsimplications for the pricing and supply of the crop nutrient,despite obstacles to launching a successful counter-bid.

"They are being instructed," the source said, adding theorder was issued late last week. "The chairman of Sinochem hasbeen asked to speak to other banks."

A Wall Street Journal report on Thursday said Sinochem hadhired HSBC to advise on options pertaining to Potash Corp.

One option being discussed is the possibility of Sinochemlinking with China's $300 billion sovereign wealth fund CIC,according to a second banking source familiar with the matter.

The most likely scenario is that China will consider buyinga blocking stake, rather than attempt a complete takeover ofPotash Corp, said both sources who were not authorised to speakpublicly due to the sensitive nature of the discussions.

Assuming a consortium pays a 20 percent premium to Potash'smarket price, a 15 percent stake would cost about $8.3billion.

Sinochem and the banks declined to comment. CIC could notimmediately be reached.

BHP CEO Marius Kloppers has poured cold water on thepossibility of a rival bid but another source close to thesituation in Europe said the latest developments are evidenceof solid interest in Potash Corp by third parties.

"This shows there's credibility from Potash Corp, it's notjust hot air. It's not just a go-it-alone defence. There'squite a lot of activity in terms of discussions," said thesource.

Chinese firms have also approached at least one big Canadianpension manager about a rival bid. The disclosure on Thursdayby Alberta Investment Management Corp, which manages some C$70billion ($67 billion) in public sector pension funds, was oneof the first pieces of hard evidence to back rumors that Chinais looking for a way to derail a BHP takeover.

Potash shares in New York closed down 5 cents at $148.50,while BHP's London shares ended the day up 1.8 percent.

OTHER BUYERS WORRIED

BHP's bid for Potash Corp, coupled with consolidation movesin the Russian potash sector, have also raised concerns amongother potash importers.

U.S. Awasthi, the head of India's largest fertilizer makerIFFCO, also expressed concerns about the M&A activity in thepotash sector.

"Everybody forgets one thing," said Awasthi. "Everybodythinks about industrial profit, but everybody forgets about afarmer's profit."

India, one of the world's largest potash importers, has noproduction capabilities of its own and relies on imports. In2008, India imported roughly 6 million tonnes of the nutrient,with about a quarter of its needs being supplied by Canadianproducers.

Earlier this year, IFFCO acquired a 10 percent stake inCalgary-based Americas Petrogas and a 20 percent stakein its GrowMax unit, which owns a potash brine projectcurrently being developed in Peru. However, India is unlikelyto attempt a move to block BHP's takeover bid.

"In India we don't have enough capital in our hands to makea big move of this sort," he said.

CANADIAN CONCERNS

In addition to concerns about job losses and declines inroyalty revenues in the event of a foreign takeover of PotashCorp, Saskatchewan -- the western Canadian province that ishome to Potash Corp -- is especially concerned by a takeoverled by a Chinese state-owned entity.

"We want to be very circumspect about sovereign entitiesfrom customer countries and their involvement in all of this,"said Saskatchewan's Premier Brad Wall in a televisioninterview.

Aside from political concerns, a bid from a Chinesestate-owned entity could face an additional layer of scrutinyunder the Investment Canada Act, notes Steve Szentesi, aVancouver-based lawyer who focuses on competition law.

"The over-arching consideration under the Investment CanadaAct, is whether a transaction is likely to be of net benefit toCanada," said Szentesi. "But in the case of state-ownedenterprises there is an additional layer of scrutiny on top ofthe general net benefit to Canada test." (Additional reporting by Narayanan Somasundaram in Sydney, Michael Flaherty and Denny Thomas in Hong Kong, Tracy Zheng inBeijing and Eric Onstad in London)