This is because large amounts of Rusal's metal produced before sanctions were imposed on April 6 are expected to be warranted for delivery against the LME's aluminium contract, a move expected to result in sliding or stagnating prices.

Rusal's aluminium was suspended from the LME's list of approved brands from Tuesday, but its metal already in LME registered warehouses before the sanctions were imposed will not be affected.

However, sources say, many banks, traders and brokers will be wary of holding any Rusal aluminium, even if it was produced before April 6, and will offload it as soon as possible onto the LME, a market of last resort during times of low demand.

Data from the exchange showed aluminium stocks in LME warehouses originating from producers in eastern Europe stood at 450,650 tonnes or 36 percent of the total as of April 6. Sources say this category would be metal mostly produced by Rusal.

Stocks of aluminium in LME warehouses since April 9 have surged more than 12 percent to 1.42 million tonnes.

For a graphic on LME aluminium stocks, click https://reut.rs/2Hb7RFw

"Lots of people are nervous about holding Rusal's aluminium, even if it is pre-sanction, that will create a discount," said Oliver Nugent, commodities strategist at ING.

According to the U.S. Geological Survey, the United States produced 741,000 tonnes of aluminium last year. It imported 6.2 million tonnes of metal and semi-fabricated products, of which more than 700,000 tonnes came from Russia.

"U.S. premiums for aluminium are up, there needs to be a divergence against the LME to incentivise exports of primary metal and semi products to the United States," Nugent said.

Physical market transactions are typically based on a premium - above $460 a tonne for aluminium in the United States and up 15 percent since April 6 - above a price set on futures exchanges such as the LME.

U.S. premiums have doubled since January when the market started factoring in tariffs on aluminium imports.

For a graphic on China, U.S. aluminium production, click https://reut.rs/2JUYiMH

However, given Rusal accounted for more than six percent of global aluminium supplies estimated at around 63 million tonnes last year, worries about shortages have fuelled a rally in LME aluminium, up more than 20 percent to $2,450 a tonne.

"LME prices might go up in the near term, but people will get over the shock and remember there aren't really any real shortages," an aluminium consumer in Europe said.

For a graphic on China aluminium exports, click https://reut.rs/2H99gfr

A surplus in top producer China could fill the deficit in the rest of the world, but this would mean premiums would have to be high enough to incentivise shipments to the United States and elsewhere.

These premiums would need to cover transport costs and a 15 percent levy on exports of primary aluminium from China.

For a graphic on aluminium premiums, click https://reut.rs/2JSEGZs

"In terms of foreign material, Rotterdam duty unpaid premiums, for example, have been around $100 a tonne for the past two months," analysts at ICBC Standard Bank said in a note published last week.

"However, if they now also begin to move higher, U.S. mid-west premiums would similarly need to increase in order to incentivise the re-routing of metal."

Major Japanese trading houses shunning Rusal's metal and scrambling for metal elsewhere have also seen physical market premiums for Japan rise to three-year highs at $170 a tonne from $117 on April 9.

For a graphic on U.S. aluminium premiums, click https://reut.rs/2HbF7wc

(Reporting by Pratima Desai; Editing by Veronica Brown and David Evans)

By Pratima Desai