(Reuters) - Canada blocked BHP Billiton's $39 billion bid for Potash Corp and left little room for a modified offer, throwing the spotlight on how the world's largest miner can find new avenues for growth.

Canada said the deal would not benefit the country, delivering a major blow to BHP Chief Executive Marius Kloppers after the 2008 failure of a $120-billion-plus bid for rival Rio Tinto and the collapse of a $116-billion iron ore joint venture with Rio earlier this year.

BHP investors are betting the Anglo-Australian miner will now return capital through a share buyback or expand its interest in oil and gas to put its growing cash pile to work.

While Canada gave BHP 30 days to come up with additional proposals that might make its hostile bid for the world's largest fertiliser producer more palatable, the chances of a successful modified offer appeared remote.

"Marius Kloppers is going to be pretty frustrated. BHP is of a size now where just about anything it wants to do of any substance is going to get blocked on regulatory grounds," said Cameron Peacock, market analyst at IG Markets in Melbourne.

POTASH INVESTORS ANGRY

The move late on Wednesday left some investors in Potash fuming after many had piled into the shares expecting a sweetened bid.

"We are quite angry because the decision will probably prevent us from unlocking the value (in Potash Corp)," said Lionel Melka, a portfolio manager with hedge fund Bernheim Dreyfus in Paris. "This is purely a political decision, it is pure protectionism."

Potash Corp shares, which had been trading about 12 percent above BHP's $130 per share bid, slid 3.2 percent by 1530 GMT after the market reopened on Thursday, compared with a 1.9 percent gain in Toronto's main stock index.

BHP shares in London shot up 6.1 percent to the highest levels at least since the merged company was created in 2001 on expectations BHP would consider returning capital to shareholders.

"BHP not spending all that money on Potash ... will increase the probability of a capital return or share buyback, and people like that possibility," said Tim Schroeders, a portfolio manager at Pengana Capital in Australia.

Based on current metals prices, the group will have a cash pile of $16.4 billion by the end of next year and a $10 billion buyback would be 5 percent accretive, Liberum Capital in London said in a note.

While investors expect BHP to look at a buyback or a special dividend, analysts also said the miner could increase its exposure to oil and gas using an estimated $11 billion warchest.

Shares in Australian oil and gas firm Woodside Petroleum rose 1.8 percent on speculation it could now fall in BHP's sights, while Oil Search rose 2.9 percent.

POLITICS BEFORE BUSINESS?

The Canadian decision was only the second time the nation has blocked a foreign takeover since 1985, sparking criticism the minority Conservative government was putting politics before business.

"Some decisions can only be taken once and there is no turning back ever -- such as the case today," Industry Minister Tony Clement said. He ruled that the deal did not meet the legal test of being a net benefit to Canada.

Under the Investment Canada Act, a foreign takeover must benefit the country in terms of jobs, exports, production and investment.

But the decision had always been a thorny one for a minority government that needed to weigh political considerations against the desire to ensure Canada stayed open for business.

The Conservatives have most of the seats in Saskatchewan, the Prairie province where Potash Corp is based, and fervent Saskatchewan opposition to the bid meant they risked losing those seats in an election likely to take place next year.

"I think it comes as a shock to the market," said John Stephenson, senior vice president at First Asset Investment Management Inc.

"I think it goes in the face ... of the direction of the government of Canada for the last number of years, which is we're open for business. Clearly, we're sending a signal that no, we're not."

Clement said he was unable to release the precise reasons for the decision, which came after strenuous objections from Potash Corp, its home province of Saskatchewan and customers of the crop nutrient essential for boosting crop production.

Potash Corp, which had unsuccessfully sought to attract a rival bid, repeated its view that BHP's $130-a-share offer was "wholly inadequate."

Analysts said Potash Corp shares were unlikely to tumble back to pre-offer levels around $112, given a rising market and strong fundamentals in the fertilizer market. Even without any bid, the firm's shares are expected to rise in the medium term.

Russian fertiliser producer Phosagro said it would announce a decision after November 15 on whether it might group together with other Russian firms and buy a stake in Potash Corp.

China, a major potash user worried about BHP's influence over supply of another key commodity, welcomed Canada's decision to block the bid.

BHP launched its bid in August, seeking an entry into the lucrative potash market, 25 percent controlled by Potash Corp.

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