UPDATE 5-Rio dumps Chinalco for iron ore tie-up with BHP

* BHP, Rio to combine Aussie iron ore operations

* Rio walks from $19.5 bln deal with Chinalco

* Rio to raise $15.2 bln in deeply discounted rights issue

* BHP stock surges 9 pct on news, Rio rises 10 pct (Adds Chinalco, government, shareholder comments, Rio CDS)

By Sonali Paul

MELBOURNE, June 5 (Reuters) - Global miner Rio Tinto (RIO.AX: Cotización) (RIO.L: Cotización) dumped plans for a $19.5 billion tie-up with China's Chinalco and agreed to set up an iron ore joint venture with rival BHP Billiton (BHP.AX: Cotización) and sell new shares to slash debt.

The new plan represents a victory for Rio shareholders who had opposed the deal with Chinalco, arguing it favoured the Chinese state firm and could give China greater influence over pricing of key commodities such as iron ore.

Shares in Rio jumped as much as 13 percent to a 7-month high of A$75.75, nearly triple the price of the rights issue at A$28.29 a share, while BHP shares rose 10 percent to A$38.60.

Rio had lined up the deal with Chinalco in February as it was desperate to pay off half its $38 billion in debt as it battled tight credit markets and a commodity price slump and had failed to sell assets to raise cash. But as equity, commodities and credit markets eased, options opened up for Rio Tinto, and shareholders stepped up pressure on it to revise the Chinalco deal.