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(Recasts with three released)
ULAN BATOR, Feb 26 (Reuters) - Mongolian President Tsakhiagiin Elbegdorj on Thursday pardoned three former foreign employees of coal miner SouthGobi Resources Ltd who were sentenced to more than five years each in prison in January.
Mongolia's sentencing of American citizen Justin Kapla and Filipinos Hilarion Cajucom Jr and Cristobal David had raised concern among foreign workers in Mongolia that they may be targeted by the government.
A court in January found the three former SouthGobi employees guilty of tax evasion and levied a fine of 35 billion tugrik ($18 million) on Toronto-listed SouthGobi in a case that had been going on for three years.
Travel bans during the investigations had kept the convicted men in Mongolia since May 2012.
A statement from President Elbegdorj posted on his official web site on Thursday said the three had been pardoned and released from detention.
Perceived resource nationalism and disputes over the country's largest mines have slowed developments in the mining sector, which is key to the country's economy, and led to a 74 percent drop in foreign investment last year.
The case began after Mongolian authorities raided the offices of SouthGobi Resources' mining unit, SouthGobi Sands, in May 2012. SouthGobi mines the Ovoot Tolgoi coal deposit in the Gobi desert, 40 km (25 miles) from the Chinese border.
The raid followed SouthGobi Resources' acceptance of an offer from Aluminum Corp of China Ltd to buy a majority stake. Mongolia blocked the deal as the government was worried about the prospect of a Chinese state-owned company taking control of the mine.
The U.S. embassy, which had raised concerns about "interpretation problems" at the trial, said Kapla was now free to return to the United States.
"The business community has made clear to us that this case negatively affects its assessment of Mongolia as a destination for foreign direct investment," the embassy said in a statement.
"We hope that in the future, the Mongolian authorities will conduct such cases through a fair and transparent process, in full accordance with Mongolian law."
Reporting by Terrence Edwards; Editing by Richard Pullin