* Company announces 1,700 redundancies
* Delay is latest hiccup for Rio, government
* Project vital for co-owners
LONDON, Aug 14 (Reuters) - Rio Tinto said on Wednesday it would have to cut up to 1,700 jobs in its Mongolian operation, after a more than $5 billion underground expansion of the giant Oyu Tolgoi copper mine was suspended.
The expansion was put on ice last month as the global miner said the Mongolian government wanted parliament, currently in recess, to approve financing for the project.
Mongolian Prime Minister Norov Altankhuyag said last week that Rio did not need to seek parliamentary approval for the development's package.
The delay marked the latest bump in the road for Rio at one of its biggest projects - and one of the world's largest untapped copper deposits - which started exporting from an open pit mine in July after two last-minute hiccups in securing government approval.
Mongolia has raised concerns about the costs of the Oyu Tolgoi expansion and the potential that rising expenditure will delay when it starts receiving its share of profits. .
The government has also complained that locals are not well represented in the management of the project.
A Rio spokesman said that the delay was now being implemented.
"There will be up to 1,700 redundancies for our employees and contractors," a Rio spokesman said.
"(Oyu Tolgoi is) still an operating business, exporting concentrate to our international customers, and infrastructure projects outside of the underground mine such as the road construction to Tsagaankhad will continue."
At the end of April 2013, Oyu Tolgoi employed 11,750 people, almost 90 percent of them Mongolian nationals.
Rio said Oyu Tolgoi shareholders - itself and the government - were still "fully committed" to resolving the issues holding back the underground development.
Oyu Tolgoi, two-thirds owned by Rio's Turquoise Hill Resources unit, is a vital new source of growth for the miner, currently dependent on iron ore mining in Australia.
It is also critical for Mongolia, as the International Monetary Fund estimates it will generate up to a third of Mongolia's GDP by the time the mine reaches full production in 2021.