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Rio Tinto has rejected BHP Billiton's bid to buy the rival mining company for $147.4 billion (£75 billion).

A successful deal would create the world's third wealthiest corporation and the largest mining firm.

Rio Tinto said that the offer of 3.4 BHP shares per one Rio Tinto share undervalued the company and was not in the interest of shareholders.

"BHP Billiton's offers, while improved, still fail to recognise the underlying value of Rio Tinto's quality assets and prospects," said Rio chairman Paul Skinner.

"Our plans are unchanged, and will remain so unless a proposal is made that fully reflects the value of Rio Tinto."

BHP formally put forward the offer yesterday, increasing its initial informal bid of three-for-one by 13 per cent.

The takeover offer came less than a week after the state-owned Chinese firm Chinalco teamed up with US base metals producer Alcoa to purchase 12 per cent of Rio's shares, expressing interest in the Anglo-Australian mining firm.

The shares were purchased at an 11 per cent premium on BHP's current offer, leaving Rio knowing it could get a better deal.

Chinalco has not yet made a formal, all-share offer like BHP, but it said it would "closely monitor further developments… we believe any offer should reflect the fundamental value of the company" in a statement yesterday.

BHP, the world's largest mining corporation, saw its shares fall dramatically during trading yesterday, with prices dropping more than 7.5 per cent in Sydney after it reported disappointing interim results.

The company's London-listed shares took off almost five per cent to close at 1,520p after reaching 1,650p earlier this month.

London-listed shares of Rio Tinto whittled off less than a third of a per cent to close at 5,417p.

BHP is widely expected to advance its bid, however analysts have commented that Chinalco has the capacity to best BHP in a bidding war since it is backed by a government bank with extensive funding.