SYDNEY (Reuters) - BHP Billiton (>> BHP Billiton Limited) and Rio Tinto (>> Rio Tinto Limited) face mounting political pressure in Australia over taxes and flooding the global iron ore market while the price of the steel-making commodity plummeted.

Independent federal Senator Nick Xenophon has called for an inquiry into the impact on the Australian economy of falling prices caused by oversupply.

Xenophon, who is on the powerful Economics Committee, said he will put the inquiry to a vote in the senate on Thursday.

Australia's treasurer Joe Hockey says the slump has caused a A$20 billion (10 billion pound) loss in government revenue in the past year and his fiscal 2016 budget released this week hinges on iron ore fetching at least $48 a tonne over the next year.

The price of the country's highest source of foreign income dropped as low as $46.70 <.IO62-CNI=SI> in April, less than half of the price a year ago, though has rebounded slightly since.

The push for an investigation follows a drive this week by Fortescue Metals (>> Fortescue Metals Group Limited) founder Andrew "Twiggy" Forrest to get Australians to lobby politicians to force BHP and Rio to stop increasing production, warning every $1 price fall costs the country A$800 million in foreign income.

Rio and BHP assert their strategies are justified and ultimately benefit Australia's mining-weighted economy.

The heads of both companies this week reiterated separate defences of the so-called "saturate and dominate" strategy, whereby higher cost producers are forced out by lower cost ones, in the $60 billion sea-traded iron ore market.

Rio and BHP each are among the lowest cost iron ore miners globally.

"We operate in highly competitive and cyclical markets, where earnings out-performance through the cycle depends on being the most efficient supplier, not supply restraint," BHP Chief Executive Andrew Mackenzie told a Bank of America Merrill Lynch conference on Tuesday.

The national mining lobby, the Minerals Council of Australia, said an inquiry was unwarranted, citing an earlier conclusion by the Australian Consumer Competition Commission that the iron ore market was operating normally.

Western Australia state political leader Colin Barnett has labeled the actions of the big producers "one of the dumbest corporate plays."

The state's Labour Party Shadow Minister for Development, Bill Johnston, is calling for a probe into why government approvals were granted for mine expansions.

Johnston also wants the investigation to look into whether Singapore marketing offices established by companies including Rio Tinto and BHP, allow them to reduce how much is paid in state royalties.

"The Labour party supports the free market, but we want to have an opportunity to make sure there actually is a free market, and whether the price returned to Western Australia is the best that can be achieved," Johnston said.

Australian iron ore miners rely on access to government owned-land and pay royalties of around 7.5 percent of revenue.

BHP's Mackenzie told Reuters the Singapore business had nothing to do with taxes but rather met expectations among customers that the company maintained an Asian presence.

(Editing by Ed Davies)

By James Regan