March 5 (Reuters) - Graphite miner SRG Mining on Tuesday called off a C$16.9 million ($12.5 million) investment deal with China's Carbon ONE New Energy Group (C-ONE) following heightened scrutiny from the Canadian government.

Shares of SRG Mining slumped 18.5% to C$0.44 in Toronto in afternoon trading.

"The conclusion to discontinue our transactions with C-ONE, though challenging, was made with a clear focus on safeguarding and advancing the interests of our shareholders and stakeholders," SRG said.

C-ONE, an anode materials company backed by Chinese entrepreneur Yue Min, last year signed the C$16.9 million deal for a 19.4% stake in SRG. The graphite miner last week said it would incorporate in Abu Dhabi Global Markets while maintaining its Canadian stock market listing.

In 2022, the Canadian government proposed beefing up its foreign investment rules to give it power to block or unwind critical investments that pose a threat to national security.

China has invested C$21 billion in Canada's mining industry between 1993 and 2023. In 2022, Canada had ordered Chinese companies to sell their stakes in three Toronto-listed lithium firms.

However, smaller mining firms, which produce lithium, nickel and other green energy metals, are worried that such scrutiny can limit their ability to raise funds.

($1 = 1.3569 Canadian dollar) (Reporting by Vallari Srivastava in Bengaluru; Editing by Sriraj Kalluvila)