(Adds Mongolian prime minister, other quotes,)
* Rio gives nod to $5.3 bln Oyu Tolgoi copper mine
* Mongolian mine part of Rio's push for more copper clout
* Shows Mongolia "back to business"-prime minister
By James Regan and Terrence Edwards
SYDNEY/ULANBAATAR, May 6 (Reuters) - Global miner Rio Tinto RIO.AX RIO.L has given the green light to a $5.3 billion expansion of the Oyu Tolgoi mine in Mongolia, a key plank in its push to become a global copper powerhouse.
The Oyu Tolgoi deposit in the South Gobi desert is one of the world's largest, and the expansion of the existing operation is critical, both to Rio Tinto's growth plans and to its shift away from its dependence on iron ore. When the project is completed, it will be the world's third-biggest copper mine.
For Mongolia, Oyu Tolgoi is the biggest foreign investment to date. Early predictions said that at its peak, the mine could account for a third of the country's economy.
Friday's long-awaited approval is also a victory for incoming chief executive Jean-Sebastien Jacques, who takes charge in early July and has been instrumental in reaching a deal with Mongolia after two-and-a-half years of wrangling over costs and taxes - just as the commodities slowdown battered the country's economy.
"Long-term copper fundamentals remain strong," Jacques, currently deputy chief executive and head of copper, said in a statement announcing the company's decision.
While Rio Tinto will continue to see the bulk of its profit from iron ore - 87 percent of underlying earnings in 2015 - it has said it will no longer fund major expansions as that market reaches saturation. Instead, it is attempting to grow in copper.
"It's clear that there aren't many ways to grow your copper business through acquisitions, nobody is selling," said Shaw and Partners analyst Peter O'Connor. "Rio is turning to internal growth with Oyu Tolgoi and going for a big position that way."
Copper is languishing near its lowest price in seven years due to a supply glut. With fewer discoveries, however, Rio hopes that by the time the underground mine opens, miners will be facing a shortage.
BETTING ON RED
Oyu Tolgoi, which translates to Turquoise Hill, has been a marathon for Rio, from its first involvement with the mine's original owner, Robert Friedland - one of the industry's best known entrepreneurs and toughest negotiators.
Rio took control of the project in 2012, just before commercial production began.
Rio Tinto is operator of the mine, which is 66 percent owned by its Turquoise Hill TRQ.TO arm and 34 percent by the Mongolian government.
"Given the current situation, any news regarding progress of Oyu Tolgoi, Mongolia's landmark project, is good news for the economy," said Chuluun Mergen, executive director of the Business Council of Mongolia.
"Mongolian businesses are starving for stability."
Mongolia's Prime Minister Chimediin Saikhanbileg said the approval was "a clear demonstration" that the country, bruised by the commodities downturn, was "back to business".
The expansion will mean digging 200 km (125 miles) of tunnels to access 25 billion pounds of copper and 12 million ounces of gold, with production starting in 2020.
Twenty international banks in December agreed to lend $4.4 billion to Rio Tinto for the Oyu Tolgoi expansion but the project still required board approval.
The parties have also agreed to a senior debt cap of $6 billion, with an option for $1.6 billion of supplemental senior debt.
Rio Tinto is one of the few big miners willing to underwrite projects at a time when most rivals operate under austerity measures in hopes of riding out one of the worst commodity downturns in decades.