Mining giants BHP Billiton and Rio Tinto on Saturday signed a $116 billion iron ore joint venture agreement to combine their Western Australian iron ore operations.

The agreement brings together two of the world's three largest iron ore producers, and has upset major customers in China. However, it still faces substantial hurdles, in particular approval by the European Commission, due to concerns about excessive dominance of the iron ore market.

The long-awaited deal was originally outlined in June, but formalized on Saturday in binding agreements signed by both companies just ahead of an agreed deadline.

In a joint statement, the companies said they anticipated completion of the deal in the second half of 2010. The statement did not mention any payment from BHP to Rio Tinto, which has the larger iron ore production, but earlier a figure of $5.8 billion had been proposed.

Under the plan, each company will each end up with 50 percent stakes in the combined Western Australian iron ore assets, but will continue to market the ore separately. The companies reiterated they expect to save at least $10 billion a year in capital and operational costs by merging their operations.

Investors said the agreement was unlikely to have much impact on the market as the deal was still clouded by uncertainty about winning approval from Europe's competition watchdog.

The major stumbling block really will be the regulatory approvals. That's still going to be up in the air, said Tim Schroeders, a portfolio manager at Pengana Capital, which owns shares in both BHP and Rio.

The companies said they would submit their plan to the European Commission and the Australian Competition and Consumer Commission. Both mining giants are dual listed, with stock market listings in both Australia and Britain.

In Brussels, European Commission spokesman Jonathan Todd said: We will ensure that there is full compliance with the EU's anti-trust rules. He declined any further comment.

The initial agreement was made six months ago following a failed bid by BHP Billiton to take over its smaller rival.

Both companies operate extensive rail and port facilities in the north of Western Australia, particularly the resource-rich Pilbara region, offering considerable potential for cost saving through cooperation.

Marius Kloppers, chief executive of BHP Billiton, said the deal had been more than a decade in the making.

It is an important milestone toward delivering substantial additional benefits to both sets of shareholders, and to the shareholders of our respective joint venture partners in the Pilbara, he said in the statement.

Rio Tinto chief executive Tom Albanese said completion of the joint venture would be a priority in 2010.

Signing binding agreements brings us one step closer to unlocking the full production potential of our Pilbara iron ore assets and achieving substantial benefits for all our stakeholders, Albanese said in the statement.

Completing the joint venture is a priority for Rio Tinto in 2010 and I look forward to realizing this vision and capturing the synergies for our shareholders.

However, the market remains to be convinced that the deal will go ahead.

The European Commission raised concerns last year about control over the iron ore market when BHP proposed a full takeover of Rio. To head off those concerns this time around, the two companies have vowed to keep their marketing separate.

Together BHP and Rio would have about 350 million tons a year of production capacity, ahead of Brazil's Vale. If BHP's expansion plans stay on target, that would increase to 375 million tons a year next year.

Iron ore is one of Australia's leading exports and the deal comes on a background of strained relations between Australia and both companies' major customer, China, over a Rio Tinto executive whom Beijing has accused of spying.

(Editing by Ruth Pitchford)