* Row over central bank adds to uncertainty
* New mining rules also spook investors
* Some investors bearish on South Africa
JOHANNESBURG/LONDON, June 21 (Reuters) - A row over central bank independence could worsen South Africa's bond sell-off after foreign investors last week dumped the biggest amount of the country's securities in nearly five months over new ownership rules for mining companies.
Any erosion of central bank independence is likely to spook investors even more.
Foreigners were net sellers of local bonds last week, dumping 2.2 billion rand ($169 million) worth of debt, the biggest weekly sell-off since early February, Johannesburg Stock Exchange data showed.
Offshore investors then sold 1.1 billion rand in bonds on Monday, after the idea of changing the central bank's mandate was floated, buying back 1.5 billion rand worth on Tuesday when the Reserve Bank said it would fight the proposal in court.
South African pension funds have already cut their holdings in local government bonds to the lowest level in nearly 4-1/2 years because of political turbulence in the country.
But yield-hungry foreign investors -- who are the largest holders of South African government bonds -- have been more resilient so far.
This is partly because South Africa is in the Citi WGBI index, followed by many funds, and local debt is rated investment grade by two major agencies. If it lost that rating over central bank independence, up to $10 billion could flow out, analysts have estimated.
S&P Global Ratings has already warned South Africa that its rating could be cut deeper if the government meddles with the central bank.
The dispute -- triggered by Public Protector Busi Mkhwebane recommending that the Reserve Bank's mandate of maintaining currency and price stability be changed so that it can focus on economic growth -- could hardly have come at a worse time.
South Africa has just sunk into recession, had its credit rating downgraded, and is echoing to calls for President Jacob Zuma to resign, which he shows no sign of doing so.
John Peta, Old Mutual Global Investors head of emerging market debt, said his firm bought South African debt after a March cabinet shake-up that sent yields higher. But it had now cut back on the ongoing political noise and as yields fall.
"No previous government in South Africa has even hinted at (changing the central bank mandate) and Zuma's people now doing it is pretty disconcerting," Peta said. "So if they do make more noise in that direction certainly the market will take notice
Morgan Stanley analysts said they believe investors are too optimistic about a resolution on the uncertainty.
"We are bearish on South Africa," the analysts wrote in a note, adding: "We believe that the main factors supporting the currency and bonds attractive real bond yields and a gradually improving terms of trade will start to lose importance gradually as evidence grows that recent political changes continue to have negative macroeconomic consequences."
Investors were already shaken in late March when Zuma dismissed respected finance minister Pravin Gordhan, triggering credit ratings downgrades to "junk" status.
The yield on the benchmark government bond due in 2026 rose to a 4-month high of 9.2 percent in the aftermath of Gordhan's axing, but has since recovered to 8.55 percent.
In another blow to investor confidence Moody's and Fitch have warned that new rules, which raised the minimum threshold for black ownership of mining companies to 30 percent from 26 percent, could deter investment. The rules are meant to redress the exclusion black people experienced during apartheid, which ended in 1994.
The Chamber of Mines, which represents mining firms, plans to challenge the new rules in court.
"There is no light in the tunnel for growth," Richard Segal, an emerging debt strategist at Manulife Asset Management. If inflation comes down, you could see some interest rate cuts which could help a bit, but the overall picture for the South African markets is still uninspiring." ($1 = 13.0258 rand) (Additional reporting by Karin Strohecker and Claire Milhench in London; Editing by James Macharia/Jeremy Gaunt)