By Roberta Rampton

WASHINGTON (Reuters) - The U.S. government should not approve a bid by China's state-owned CNOOC <0883.HK> for the U.S. assets of Canadian oil firm Nexen unless the merged company agrees to pay royalties on all oil drilled offshore, or spins off the assets, Representative Edward Markey said on Monday.

In a letter to Treasury Secretary Timothy Geithner, Markey said Nexen has not paid royalties on 32 million barrels of oil and 34 million cubic feet of natural gas drilled in the U.S. Gulf of Mexico through May 2012.

Nexen holds at least two leases issued under the 1995 Deep Water Royalty Relief Act, said Markey, the top Democrat on the House of Representatives Natural Resources Committee, who has long criticized companies that have benefited from a royalty loophole in the law.

"Giving valuable American resources away to wealthy multi-national corporations is wasteful, but giving valuable American resources away to a foreign government is far worse: it has the potential to directly undermine American economic and national security," Markey said in the letter.

Markey is the second U.S. lawmaker to ask Geithner to put conditions on CNOOC's bid for Nexen, which has about 10 percent of its assets in the U.S. Gulf.

Geithner chairs a panel that examines foreign investment in U.S. assets for national security issues, and has the power to block deals or require modifications such as divestitures.

On Friday, Democratic Senator Charles Schumer told Geithner that the United States should use CNOOC's bid as an opportunity to demand changes to China's foreign investment policies.

(Additional reporting by Ayesha Rascoe; Editing by Will Dunham)