MELBOURNE (Reuters) -A recent rally in lithium prices could ease pressure on some beleaguered producers in Australia who have been trying to shrink exposure to the battery material, prompting them to drop plans to sell some projects, sources and analysts said.

Shares in Australia's lithium miners have jumped by as much as a third this month and extended gains this week after news of supply cuts in China sparked hopes that the cycle was turning.

That follows a years-long fall in prices because electric vehicle sales were slower than expected, forcing lithium companies to mothball operations and more recently to consider disposing of assets to rebuild their balance sheets.

Australia's Mineral Resources (MinRes) and Chile's SQM have tried to sell stakes in their operations this year, sources told Reuters on condition of anonymity, while IGO looks to restructure a lithium refining joint venture with China's Tianqi Lithium.

Although the rally has been fuelled by speculators, it will soothe producers burning through cash, analysts say.

That could take off the table assets once up for sale, losing buyers the chance to acquire them at the bottom of the business cycle at a time when the West is racing to build a battery supply chain outside China.

"The common thread in the story is diabolical prices and market conditions," said analyst Dan Morgan of Barrenjoey in Sydney.

"All Australian producers would be breathing an enormous sigh of relief ... Some non-palatable and permanent strategic options they had been considering may get put back in the bottom drawer."

Prices of hard rock spodumene, the lithium-bearing mineral, have rebounded to about $880 a tonne from a fall to four-year lows near $610 a tonne in mid-June, but remain well short of 2022 peaks above $6,000.

"Potentially the worst is over for the sector, but it remains quite difficult to call as it's not clear whether these (cuts) are temporary or permanent," E&P Financial said in a note, referring to China's supply cuts.

Giant Chinese electric vehicle battery maker Contemporary Amperex Technology (CATL) said on Monday it had suspended mining operations in the southern region of Yichun after a mining licence expired on August 9.

The surge in share prices was probably fuelled by short-covering rallies, analysts said. Australian lithium miners are among the top five most shorted companies on the ASX stock exchange, says data provider Shortman.

SELLING POTENTIAL

A sale process by debt-laden MinRes on its Mt Marion and Wodgina lithium assets in Western Australia this year drew Indian and Japanese interest but ultimately failed as buyers balked at the price tag of more than $2 billion, two sources familiar with the matter said, on condition of anonymity.

"As a policy, we do not comment on market speculation," said a company spokesman, while adding, "MinRes always looks at opportunities to maximise returns to shareholders."

In March, Reuters reported that four Indian state firms were in talks with SQM for a stake of 20% in its two lithium projects in Australia for $600 million, as New Delhi moved to secure supplies of the key EV battery metal.

SQM did not have an immediate comment.

In the last month, IGO has said it was reviewing options around the loss-making lithium refinery that analysts expect would include a sale of its share.

IGO declined to comment.

Just as Australia has taken the brunt of the world's production cuts, supply can come back on line, cooling prices.

Late last year, its biggest independent producer, Pilbara Minerals, put its Ngungaju plant in Western Australia under care and maintenance because of sustained weakness in spodumene prices.

But if conditions improve, the plant could be ramped back up in as little as four months, Pilbara CEO Dale Henderson told reporters on August 1.