BEIJING, Aug 25 (Reuters) - A gas explosion in a Chinese mine that was operating illegally killed seven people on Saturday, as officials began handing compensation to families of 181 miners trapped and presumed dead after a flood last week.

Twenty-three people were working underground in the Liyuan mine in northern Inner Mongolia region at the time of the blast, in the early hours of Saturday morning, but the others escaped, the official Xinhua news agency reported.

The mine was being renovated, and should not have been producing coal, the report quoted investigators from a work safety office saying.

Local police have detained several people and are hunting a shareholder who has gone on the run, Xinhua added.

In eastern Shandong province around 560,000 yuan ($74,000) of "consolation money" has been handed out to the families of 181 miners trapped in two shafts flooded with mud and water, the agency reported.

Rescuers are still pumping the shafts clear but safety officials have recognised the desperate efforts to save them face near impossible odds.

The drama over the missing miners has become a test of shaken public faith in government promises to improve safety at mines -- long the world's deadliest as producers strain to feed voracious energy demand.

More than 2,000 people have been killed in China's coal mines in the first seven months of this year alone. ($1=7.567 Yuan)

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