* China's Virtue Dragon shelves $1.9 bln expansion plan
* Indonesia is prepared to face any lawsuit - official
* Vale shares drop 16 pct, Antam jumps over 6 pct
* Freeport says rule changes have wide-ranging impact (Recasts, adds lawsuits, comment from Freeport and govt)
By Wilda Asmarini and Fergus Jensen
JAKARTA, Jan 13 (Reuters) - A major Chinese investor in Indonesia's smelter industry said on Friday it was considering legal action and would put on hold its expansion plans in the country, after the government abruptly reversed a ban on the export of nickel ore and bauxite.
Indonesia's government faced a sharp industry backlash after it unveiled sweeping new rules on Thursday allowing the export of nickel ore and bauxite under certain conditions.
The policy change was a blow to Indonesia's smelting industry which took off after the country banned mineral ore exports in 2014 to spur higher-value processing.
Virtue Dragon Nickel Industry, a unit of China's De Long Nickel Co Ltd, and other smelter operators are jointly reviewing legal steps against the Indonesian government, Virtue Dragon's general manager Rudi Rusmadi told Reuters by telephone.
Virtue Dragon, which had invested up to 7 trillion rupiah ($525 million) to build smelters in Indonesia, is also putting on hold a further expansion plan worth 25 trillion rupiah due to the policy shift, Rusmadi said.
Chinese companies that have sunk investments into Indonesia "cannot sleep well", Rusmadi said. "They are in a dilemma. They have invested and yet there's no legal certainty."
A civil society group separately plans to challenge Indonesia's new mining rules in the country's Supreme Court, alleging they breach the 2009 mining law, one of the group members told Reuters on Friday.
Indonesia's government is prepared to face any lawsuit, said Iwan Prasetya Adhi, secretary of the coal and mineral directorate-general at the mining ministry.
Government officials have defended the new rules, which require nickel miners to dedicate at least 30 percent of their smelter capacity to process low-grade ore, defined as having a nickel content of less than 1.7 percent.
"Previously the low-grade ores could not be used and were just thrown away. But with the new rules, we can use them now," Fajar Harry Sampurno, the deputy state enterprises minister, told Reuters.
The government's decision on Thursday sent nickel prices tumbling more than five percent at one point, as the resumption of nickel ore exports from Indonesia is projected to flood global markets and increase total supply.
Analysts said PT Vale Indonesia Tbk, which exports only processed nickel from Indonesia, is likely to be one of the worst hit by the drop in nickel prices.
Vale shares plunged 15.9 percent on Friday, its biggest intra-day percentage fall since 2008. Nearly 139 million shares were traded, 11 times the average full-day volume over the past 30 days.
"The opening of the tap for nickel ore exports (even when limited to low-grade nickel) can have a negative impact on the developing nickel industry in Indonesia," Vale Indonesia President Director Nico Kanter said in an emailed statement.
Exports may be difficult to supervise, Kanter said, adding that a prolonged fall in nickel prices would hurt the income of smelter companies in Indonesia.
Shares of state-controlled miner PT Aneka Tambang Tbk , however, jumped 6.4 percent as analysts said an increase in its sales of nickel ores could make up for the drop in prices.
"Nickel export is officially opened, we don't know the exact amount of nickel ore that Antam can export, but it is a definite positive to Antam," broker Trimegah Securities said in a report on Friday.
"It may ruin the global nickel supply and thus it is negative for Vale Indonesia."
Antam Chief Executive Tedy Badrujaman welcomed Indonesia's new regulation, saying the move would revive the mining industry and boost regional economies.
Asked when Antam will start shipping out nickel ores, the company's corporate secretary, Trenggono Sutioso, said: "We are still calculating and planning for the opportunity to sell low-grade nickel, both domestically and overseas."
The new rules are a mixed bag for U.S. mining giant Freeport-McMoRan Inc, which now has a window to continue copper concentrate exports, but has to divest an up to 51 percent stake from 30 percent previously.
The policy changes will have a wide-ranging impact, a spokesman for Freeport's Indonesian unit said, noting that the company was still studying the latest rules.
Additional reporting by Fransiska Nangoy, Bernadette Christina Munthe, Cindy Silviana, Kanupriya Kapoor and Eveline Danubrata; Writing by Eveline Danubrata; Editing by Clarence Fernandez and Adrian Croft