UPDATE 2-Kinder Morgan halts most work on disputed Canada pipeline expansion

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April 8 (Reuters) - Kinder Morgan Canada on Sunday suspended most work on a contentious C$7.4 billion ($5.8 billion) pipeline expansion that has become the focus of protests, and said it would decide by May 31 whether to continue.

The announcement was a victory for the British Columbia government, local activists and environmental groups, and a blow to the Liberal government of Prime Minister Justin Trudeau, which approved the project and says it is in the national interest.

Many in the industry are concerned about whether any new pipelines can be built in Canada at a time when existing capacity is stretched.

Kinder Morgan wants to nearly triple the capacity of its existing Trans Mountain pipeline, which takes crude from Alberta's oil sands to a facility in the Pacific province of British Columbia. It is currently carrying out preliminary work and has not yet started construction.

The project is considered crucial for Canada's oil industry, but is fiercely opposed by British Columbia's left-leaning New Democratic government, many municipalities, some Aboriginal groups, and environmental activists concerned about possible oil spills.

"We will be judicious in our use of shareholder funds. In keeping with that commitment, we have determined that in the current environment, we will not put KML shareholders at risk on the remaining project spend," Kinder Morgan Chairman Steve Kean said in a statement.

"If we cannot reach agreement by May 31, it is difficult to conceive of any scenario in which we would proceed with the project," he added.

British Columbia government proposed a suite of new environmental rules this year that were seen as a direct attack on the project.

It later edged back from a pledge to block increased shipments of crude oil through the Pacific Coast province, which had sparked a trade war with neighboring province Alberta.

Alberta Premier Rachel Notley expressed optimism that the project would go ahead and repeated calls on Trudeau's government to do more to ensure it will be built.

Notley, in remarks to reporters, also suggested that she might impose new sanctions against British Columbia.

Canada Natural Resources Minister Jim Carr said in a statement that "with all our partners, we continue to consider all available options." He did not give details.

Trudeau visited the oil sands on Friday and reiterated the government's determination that the expansion go ahead.

($1 = 1.2767 Canadian dollars) (With additional reporting by Julie Gordon in Vancouver and Bhanu Pratap in Bengaluru; Editing by David Gregorio)