LONDON (Reuters) - Diversified miner Xstrata made a counterbid for Canada's Falconbridge on Wednesday with a cash offer valuing the nickel miner at $17.9 billion, trumping a bid by Canadian Inco.

Mining shares, including Xstrata, surged following the news and as commodity markets stabilized, making miners among the biggest gainers on London's blue chip FTSE index.

Switzerland-based Xstrata became Falconbridge's largest shareholder in August when it bought a 20 percent stake and had been expected to bid for Falconbridge against Canada's Inco, the world's second-biggest nickel miner.

The deal comes amid extreme volatility in global markets, with many commodities consolidating after big losses following record highs. Nickel now stands at $20,600 per ton, having swung from a $21,850 high Friday to Tuesday's $19,300 low.

Xstrata is offering C$52.50 cash a share, or C$16.1 billion for the Falconbridge shares it does no already own.

The deal would add nickel to Xstrata's copper, coal, zinc and chrome operations to create the world's fifth-largest diversified mining company and be substantially earnings and cash flow accretive in the first full year of consolidation, it said.

Chief Executive Mick Davis said: "It is not so much short-term prices which influence an offer, it is really your medium to long-term view," and added the Falconbridge transaction had been "on its drawing board for quite some time."

Davis said the offer gave Falconbridge shareholders "a compelling opportunity to realize a guaranteed cash value with no market and minimal regulatory risk and is significantly superior to the revised offer Inco has made for Falconbridge."

Xstrata shares, which had outpaced the booming mining sector by 18 percent over the past year, were up 2.2 percent at 2,147 pence to value it at $27 billion. They hit a 2,530p high last Thursday.

In October, Inco made an agreed offer for Falconbridge. That deal has been extended several times pending regulatory clearance and Inco has raised its offer to about C$19 billion.

Last week, Teck Cominco, the world's top zinc miner, offered to buy Inco for C$17.8 billion but only if Inco scraps its Falconbridge bid.

Inco replied by saying Saturday it would raise its agreed offer for Falconbridge to C$51.17 a share in cash or 0.6927 of an Inco share plus 5 Canadian cents for each Falconbridge share.

Numis Securities analyst John Meyer said it was unlikely Inco would be able to counter Xstrata's bid and that it would be difficult for a third player to enter the fray, given Xstrata's stake in Falconbridge acquired at C$28 per share.

"For another player to bid C$52.50 per share would require them to pay $1.9 billion more... than Xstrata," he said.

Xstrata's acquisition of Falconbridge would be funded by new debt facilities underwritten by Barclays, Deutsche Bank, JP Morgan Chase Bank, and Royal Bank of Scotland, the company said.

"Xstrata management have little to lose by making a cash offer for Falconbridge as they are a 20 percent shareholder," UBS said in a broker note. "Acquiring existing production provides certainty of cash flows immediately and sector consolidation is better than building marginal new supply."

UBS also said that as a standalone company, Xstrata was trading on a multiple of 6.8 times the bank's forecast for 2007 earnings, a 25 percent discount to its larger cap peers.

"If it were successful on Falconbridge, we believe the deal would be company-transforming, EPS and cash accretive and potentially leads to a re-rating of Xstrata," the bank said.

Xstrata also said on Wednesday it was placing 32.5 million new shares and 29.5 million shares held by Batiss Investment, with the proceeds being used to pay back debt taken when it bought its stake in Falconbridge last year and its one third interest in the Cerrejon coal operation in Colombia in March.

On Tuesday Xstrata announced it was buying Peru's Tintaya copper mine for $750 million from global miner BHP Billiton. Analysts had said the bolt-on acquisition would not thwart any Xstrata bid for Falconbridge.

The timing of Xstrata's Falconbridge bid stemmed from the deal it struck last August when it bought its stake from Brascan .

The terms of the trade meant that if Xstrata acquired more Falconbridge shares at a higher price, it had to pay Brascan the difference. That requirement expired May 15.

_______________

Bank of England conflicted on rates. Read the full story here.

AstraZeneca in $1.3B biotech deal. Read the full story here.