* Sale collapse raises questions for IMF loan deal
* Government to retain control of loss-making mill (Updates with details)
By Ivana Sekularac
BELGRADE, Feb 17 (Reuters) - The sale of Serbia's sole steel mill to U.S. firm Esmark collapsed on Tuesday, in a blow to government efforts to rein in spending under the terms of a loan deal with the International Monetary Fund (IMF).
Prime Minister Aleksandar Vucic said his government was unable to agree to the sale and that the loss-making Zelezara Smederevo plant would remain in state hands.
He said the government had been unable to secure a guarantee from Esmark that the plant, which employs 5,000 people, would not be closed once the raw material currently in stock was used up.
"It was a difficult decision for us," he told a news conference. "For months we've been working to save Zelezara."
The steel mill has been draining $120 million per year in taxpayers' money since Serbia bought it back from U.S. Steel in 2012 to prevent it from closing at a time of weak steel prices and subdued demand.
The government committed to cut subsidies under a 1-billion-euro precautionary loan deal with the IMF, which is subject to final approval by the Washington-based lender on Feb. 23.
Vucic said the collapse of the sale would not jeopardise the IMF loan, crucial to keeping down debt costs and stabilising the dinar currency.
Esmark was named last month as the only valid bidder for the plant south of the Serbian capital, Belgrade.
The company had pledged to invest $28 million this year to restart the plant's idled second furnace, and $400 million in total over the next five years.
But experts had long questioned the plant's long-term viability.
"We're extremely disappointed we could not reach a definitive agreement with the Republic of Serbia," Esmark CEO James Bouchard said in a statement.
Vucic, however, said: "This is not the end of Zelezara."
He said the government would seek to have new management in place by the end of March, with the aim of increasing production to over 1 million tonnes this year compared with some 340,000 last year.
The government's plan needs to be approved by the European Commission, as Serbia is seeking to join the European Union and its pre-accession agreement committed it to ending financing for its steel sector as of Feb 1.
"This doesn't mean the end of (the) privatisation of Zelezara," said Boris Milosevic of the KPMG, the government's adviser in the sale process.
"This is just a transient road to final solution," Milosevic said, adding some $170 million in raw materials in stock currently would be enough to increase production without government subsidies. (Reporting by Ivana Sekularac; Writing by Matt Robinson; Editing by Ruth Pitchford and Mark Potter)