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UPDATE 2-Mubadala not eyeing bid for Brazil's JBS, source says

(Recasts to include source denial, share move)

SAO PAULO, June 16 (Reuters) - Shares of JBS SA erased gains on Friday after a source denied that Abu Dhabi sovereign wealth fund Mubadala Development Co was arranging partners to make a bid for control of the world's largest meatpacker.

A person with direct knowledge of the matter, who requested anonymity to speak freely, said reports by Brazilian business magazine Exame that Mubadala was forming a consortium "in complete secret" to bid for JBS were inaccurate.

Exame, which did not say how it obtained the information, said other bidders, including U.S. food producer Cargill Inc, might be interested in acquiring certain JBS assets, which could trigger a JBS breakup.

Exame did not mention the name of other potential partners that Mubadala was sounding out for a JBS bid. The magazine report came a month after members of the billionaire Batista family, who control about 42 percent of JBS, signed a plea deal in a corruption probe in their native Brazil.

Efforts to reach Mubadala's media office outside working hours were unsuccessful. The Batista family's investment holding company J&F Investimentos SA, São Paulo-based JBS and Cargill did not have an immediate comment.

Shares of JBS erased gains after the source denied the Exame report, falling 2 percent at 01:10 p.m. local time (1610 GMT). They rose as much as 5.9 percent to 7.16 reais earlier.

Last month, the Batistas agreed to pay a record-setting fine of 10.3 billion reais ($3.1 billion) related to corruption and bribery allegations. Shares of JBS have shed 29 percent since May 16, when brothers Joesley and Wesley Batista admitted in separate plea deals to bribing over 1,800 politicians.

Part of the testimonies in the plea deal implicated President Michel Temer, who Joesley Batista accused of working to obstruct a major corruption probe. Temer denies the accusations.

State loans helped fuel growth at J&F over the past decade, enabling it to keep control of JBS while expanding into fashion, dairy production, pulp processing and banking. JBS grew from a mid-sized slaughterhouse in Brazil's Midwest into one of the world's top-three food processing companies in over a decade through acquisitions backed in part by government funds.

($1 = 3.28 reais) (Reporting by Guillermo Parra-Bernal and Bruno Federowski; Additional reporting by Tatiana Bautzer in São Paulo; Editing by Phil Berlowitz and Tom Brown)