JOHANNESBURG (Reuters) - South Africa's state prosecutor said on Sunday he has yet to decide whether to proceed with fraud charges against Finance Minister Pravin Gordhan, denying a newspaper report that the charges may be dropped after a review.

Gordhan is accused of fraudulently approving, in a previous post as head of the revenue service, early retirement for a deputy tax commissioner and re-hiring him as a consultant, costing the tax agency 1.1 million rand ($79,586).

Gordhan has denied any wrongdoing, saying the case is politically motivated. The state prosecutor has rejected allegations of political interference.

His two co-accused, Oupa Magashula and Ivan Pillay, who worked under Gordhan during his tenure as head of the South African Revenue Service from 1999 to 2009, asked the state to review the charges. Gordhan refused to request a review.

The City Press newspaper reported on Sunday that the office of state prosecutor Shaun Abrahams had drafted a letter indicating his intention to drop the charges. The letter was to be sent to the lawyers of the three accused before they appear in court on Wednesday, the newspaper said.

"They are talking rubbish," Abrahams told Reuters. "I am applying my mind to it and I hope to made a decision soon."

National Prosecuting Authority spokesman Luvuyo Mfaku said Gordhan's refusal to apply for a review would not affect the process.

"If the national director decides to review on the basis of their (the co-accused) representations and say I am not proceeding with prosecution, automatically for all three it applies," Mfaku.

Worries that Gordhan could be removed from his job have rattled markets and increased the risk that credit rating agencies would downgrade South Africa to "junk" status, undermining efforts to revive economic growth.

The turmoil around the minister caused the rand to sink by 4 percent, but the currency has since recovered because of the support the minister has received.

($1 = 13.8215 rand)

(Reporting by Ed Cropley and Olivia Kumwenda-Mtambo, editing by Larry King)