* Watchdog says deal unlikely to substantially lessen competition
* Says would have been difficult to impose conditions
* Shell says deal still on track for early 2016 completion
* China yet to approve deal (Adds manufacturers' comments)
By Sonali Paul
MELBOURNE, Nov 19 (Reuters) - Royal Dutch Shell RDSa.L cleared a major hurdle to its $70 billion takeover of BG Group BG.L on Thursday, winning a green light from Australia's competition watchdog, which said the deal would not change the dynamics of the domestic market.
The acquisition will make Shell the world's top liquefied natural gas (LNG) trader, although it still needs approval from China and Australia's Foreign Investment Review Board to go ahead as planned in early 2016.
The Australian Competition and Consumer Commission (ACCC) was not convinced by concerns raised by big local gas users that the takeover would hurt competition in eastern Australia if Shell's Arrow Energy were to sell its coal seam gas into BG's Queensland Curtis LNG plant for export.
"The ACCC's view is that the proposed acquisition would be unlikely to substantially lessen competition in the wholesale natural gas market, in either Queensland or eastern Australia more broadly," commission chairman Rod Sims said in a statement.
Arrow was not currently supplying domestic customers and appeared unlikely to do so in the future, so aligning it to supply BG's LNG plant would change nothing, Sims said.
Imposing conditions on the deal would have been "extremely difficult", he added.
"There is too much uncertainty about the amount and timing for future gas supplies for the ACCC to be satisfied that Arrow and BG would be meaningful competitors in the domestic market in the absence of the acquisition."
Shell and BG said the decision was crucial to the deal, after having secured approvals from anti-trust authorities in Brazil, the European Union and the United States.
"The addition of BG's integrated gas assets in Australia to Shell's global portfolio is one of the main strategic drivers behind the recommended combination, making ACCC approval a major step forward for the deal," Shell CEO Ben van Beurden said in a statement.
Manufacturers worried about a lack of competitive gas supply on the east coast were disappointed the commission could not impose conditions on the merger but pinned their hopes on the Australian Foreign Investment Review Board (FIRB).
"We believe that the FIRB have a duty to test the national interest and we would hope that conditions on the merger be considered," Manufacturing Australia, a group that includes the biggest industrial east coast gas user, Incitec Pivot IPL.AX .
(1 Australian dollar = $0.7104)