UPDATE 1-Indonesia probes rice trade as food company denies breaching rules

* Company denies allegations of incorrect labelling

* Police raided warehouse near Jakarta last week

* Prices of staple grain are politically sensitive in Indonesia (Adds police chief comment, share prices, context)

JAKARTA, July 25 (Reuters) - A unit of Indonesian food manufacturer Tiga Pilar Sejahtera Food on Tuesday denied allegations of rice hoarding, incorrect labelling and unfair business practices, after a police probe caused the company's shares to tumble last week.

Tiga Pilar shares had lost more than 40 percent and hit an 18-month low of 905 rupiah ($0.068) on Friday, after police announced an investigation of its unit PT Indo Beras Unggul (IBU). Prices had partially recovered to 1,340 rupiah at 0500 GMT on Tuesday.

Police raided IBU's warehouse near Jakarta on Thursday, confiscating more than 1,000 tonnes of rice and alleging the company had bought lower quality subsidised grain that was then labelled as premium rice when sold.

"We did not use subsidised rice as our raw material," IBU spokesman Jo Tjong Seng told a news conference, adding that the firm believed an analysis by a police-led food task force had shown it had not wrongly labelled rice.

"We are looking into this (and) later will present their violations and evidence so that the public understands," National Police chief Tito Karnavian said on Tuesday, noting that police were working with other authorities to maintain food price stability.

"Our focus is now on distribution channels," he said, referring to the raid on the IBU warehouse near Jakarta.

"If there was fraud, then there's unfair competition, (so) controls and intervention are needed," he said, referring to broad allegations of hoarding and incorrect labelling by rice traders in the country.

Government analysis has shown that Indonesia's millions of rice farmers are making around 60 trillion rupiah ($4.50 billion) in annual profit from the grain, while its 400,000 traders' profits were 130 trillion rupiah, Karnavian said.

The police chief said there should be a situation where farmers could survive and traders make profit "but not too much", and with consumer prices remaining stable.

Rice prices are politically sensitive in Indonesia because of their impact on the poor and due to their weighting in the country's inflation rate.

The government has blamed food hoarding and speculators for high prices, though the U.N. food agency has also said that Indonesia's self-sufficiency policy has driven up food prices.

Indonesia's Trade ministry sets a reference price for staples including rice every four months, but there are currently no formal sanctions for traders selling goods above these prices.

Trade Ministry Secretary General Karyanto Suprih said on Friday he was waiting for the results of the police investigation, but could freeze the company's trading permit. ($1 = 13,315 rupiah) (Reporting by Bernadette Christina Munthe in Jakarta; Writing by Fergus Jensen in Singapore; Editing by Ed Davies and Joseph Radford)