UPDATE 1-Australia's Origin halts coal seam gas drilling on asbestos fears

* Origin stops work at 12 Queensland sites

* Asbestos-tainted drilling fluid being removed

* Origin has lined up alternative product for drilling

(Adds Origin, Imdex comments)

MELBOURNE, March 13 (Reuters) - Origin Energy ORG.AX , in charge of coal seam gas drilling for the Australia Pacific liquefied natural gas (LNG) project, said on Thursday it had stopped work at 12 sites in Queensland state as asbestos had been found in drilling fluids it was using.

Origin said the supplier of some of its drilling fluids, Australian Mud Company (AMC), owned by Imdex Ltd IMD.AX , had found that its imported walnut-shell based product Nutplug contained asbestos.

The asbestos scare is likely to add to concerns over coal seam gas drilling. Farmers and environmentalists already fear that "fracking", a drilling technique that uses high-pressure water, sand and chemicals to extract gas trapped in rock, could contaminate water supplies.

Origin said it was providing support to anyone who may have been exposed to the drilling fluids.

The company had quarantined all of the affected material and was in the process of investigating how many people may have been affected, Origin spokeswoman Lina Melero said. The product would be disposed of safely.

She declined to comment on when drilling may resume at the 12 sites. Origin said it has found an alternative product to replace Nutplug, which is used to seal wells and sometimes as a drill bit lubricant.

AMC is withdrawing the product from the market and investigating where it came from, IMDEX said in a statement. It said it was trying to find out how a product that was supposed to be made of nutshells could have been tainted with asbestos.

Imdex Managing Director Bernie Ridgeway was not immediately available to comment on whether AMC has supplied the product to other companies in Australia or elsewhere.

Origin is a 37.5 percent owner of the Australia Pacific LNG project, alongside ConocoPhillips COP.N with 37.5 percent and China's Sinopec 600028.SS with 25 percent. Australia Pacific LNG is one of three LNG projects in Queensland, which are the first in the world to use coal seam gas for LNG.

Origin stock slipped 0.6 percent to A$14.48, while Imdex's shares fell 5.9 percent to A$0.64 in a broader market that was up 0.6 percent.

(Reporting by Sonali Paul; Editing by Joseph Radford and Richard Pullin)

((Sonali.Paul@thomsonreuters.com)(+61 3 9286 1419)(Reuters Messaging: sonali.paul.thomsonreuters.com@reuters.net))

Keywords: AUSTRALIA ORIGINENERGY/ASBESTOS