CANBERRA - AUSTRALIAN Prime Minister Kevin Rudd is facing the biggest challenge of his short time in power with a hostile upper house of parliament on Tuesday set to block budget revenue measures worth A$6 billion (S$7.4 billion).

The threat puts at risk Rudd's plans to raise taxes on pre-mixed 'alcopop' alcoholic drinks and luxury imported cars, and impose a A$2.5 billion tax on exempt gas condensate produced at Australia's offshore North West Shelf oil and gas fields.

Conservative rivals on Tuesday said they would oppose the budget laws in the Senate, forcing Rudd to negotiate with a disparate group of two independents and five Greens holding the balance of power.

'The government knows my phone number. My door's open to them, I'll keep talking to the government,' newly-elected independent Senator Nick Xenophon told reporters on Tuesday, adding he would not automatically rubber stamp new laws.

The conservatives, who held a one-seat senate majority until July 1, want to vote down the tax increases worth A$6.2 billion over four years, saying the measures would push up prices with inflation already at 16 year highs.

They say the tax rises were not flagged during last year's election campaign, and would represent only about A$1.5 billion a year in lost revenue, or 0.5 per cent of government income.

Mr Rudd said the Senate was undermining the government's economic management by trimming the budget surplus, forecast at A$21.7 billion in 2008/09 and more than A$79 billion over four years.

Australia has run surplus budgets for 11 of the past 12 years. The former conservative government used the surpluses to pay off A$96 billion of foreign debt and to set up an investment fund to cover ongoing public service pension liabilities.

North West Shelf Venture, which produces about 54 per cent of Australia's natural gas and 39 per cent of oil, condensate and LPG, have lobbied strongly against the new condensate tax, expected to bring in A$2.5 billion over four years.

Mr Rudd wants condensate, a by-product of natural gas that is used to make gasoline and diesel, taxed the same way as crude oil.

The North West Shelf venture partners are Woodside Petroleum, BHP Billiton Plc/Ltd, Chevron, BP Plc, Royal Dutch Shell and Japan Australia LNG (MiMi) Pty Ltd, which is a joint venture of Mitsubishi Corp and Mitsui and Co.

The opposition parties and independents will finalise their position on the condensate tax in September, after a Senate inquiry into the plan reports back to parliament.

Greens leader Bob Brown, who said the government had largely ignored the Greens over the past nine months in power, said negotiations had started on key laws, but Greens' support could not be guaranteed.

'We'll be taking each piece of legislation as it comes along,' Mr Brown told reporters on Tuesday.

Mr Rudd's centre-left Labor Party won power last November after almost 12 years of conservative rule, but the election handed the key Senate swing votes to previously minor players.

'In these difficult economic times, the worst thing you can do is blow a hole in the budget,' Rudd told parliament.

'If you are facing uncertain global economic times ahead, the worst thing you can do is send a message of uncertainty to the international economic and financial community about whether this government's budget is going to pass the parliament, and whether its surplus is going to remain intact.' -- REUTERS