Aug 29 (Reuters) - Shaanxi Coal Industry won approval from the China Securities Regulatory Commission (CSRC) for its potential 17.3 billion yuan ($2.7 billion) initial public offering in Shanghai, the CSRC said on Monday.

The approval will pave the way for Shaanxi Coal to be the country's third-largest publicly traded coal miner by output after China Shenhua Energy Co Ltd and China Coal Energy Co Ltd .

Shaanxi Coal will join Sinohydro Group, builder of the Three Gorges dam, in braving a volatile stock market to list on the Shanghai Stock Exchange.

The CSRC made the brief announcement of the approval on its website (www.csrc.gov.cn). It did not elaborate.

China's stock markets have performed poorly in 2011, with the benchmark Shanghai composite index falling around 7 percent since the start of the year.

Sinohydro, which said its IPO would seek to raise money to fund projects and other items worth about 17.3 billion yuan, obtained the CSRC approval in July.

The Shaanxi Coal and Sinohydro IPOs are set to overtake Chinese wind turbine maker Sinovel Wind's 9.5 billion yuan deal in January to be mainland China's biggest IPOs this year.

The deals will also help lift Shanghai's IPO market after a lull in the first half. The Shanghai bourse captured only around a third of mainland China's IPO market in the first half of 2011.

Shaanxi Coal will issue up to 2 billion shares in the offering, according to a draft prospectus posted on the CSRC website. Proceeds would fund mining activity and replenish working capital, it said. ($1 = 6.387 yuan) (Reporting by Soo Ai Peng; Additional reporting by Ben Blanchard in Beijing; Editing by David Holmes)