The miner has already announced the loss of 500 jobs in recent months, including 100 at its headquarters in Perth.
The ABC understands up to 3,000 jobs could go from BHP's iron ore division, which currently employs 16,000 people.
A BHP spokeswoman said external consultants have been employed to conduct a review in order to cut costs.
The ABC understands many of the jobs losses will involve contractors whose positions are coming to an end and their contracts will not be renewed.
BHP says it has been open about the review and holds regular meeting with workers to keep them updated.
The spokeswoman says the job cuts are necessary to ensure BHP Billiton remains a competitive, world-class operation.
In a statement released to the ABC this morning, BHP defended the proposed job cuts.
"BHP Billiton Iron Ore regularly undertakes improvement initiatives and organisational reviews. We have engaged external consultants to assist with this process.
This is about continuing to safely improve our business and ensuring we are a competitive, world-class operation.
We have been open with our employees about the review, and we hold regular all employee Town Hall meetings and question and answer sessions with the business leaders as a matter of course.
In situations where employees are impacted we will undertake every effort to assist them throughout the process and to seek redeployment opportunities where possible."
It is understood private consultants are recommending BHP shed 20 per cent of its current workforce in its iron ore division to ensure it remains competitive.
Iron ore prices have fallen more than 30 per cent this year to around $90 a tonne.
Flow-on effects 'worrying': union
Steven Price from the Australian Workers Union says members are in a state of disbelief about the possible cuts.
"It comes as a complete surprise to our members and naturally from that there's angst about their job security and that then creates safety concerns on the job, because people aren't thinking about what they should be," he said.
"They've got other things on their mind about paying their mortgage, how long they've got a job, if they've got a job."
Mr Price says the economic flow-on effect from large scale job losses in the iron ore sector could be huge.
"The worrying part about it is of course that iron ore has always been pretty much the foundation of what everyone else makes their decisions on," he said.
"And with an iron ore company making such a significant reduction in manning numbers, I think that will put a lot of concern through a lot of other industries through the state."
Planned cuts unsurprising in current climate
Resource analyst Giuliano Sala Tenna, from Bell Potter Securities, said BHP needs to cut costs.
"It doesn't surprise me that BHP along with other iron ore miners are indeed looking at how they can extract further cost savings from their operations," he said.
"In the good times when iron ore pricing was north of $140 a tonne there's no doubt that all the iron ore miners probably got a little bit fat in a sense of their staff and operations.
"The magnitude of the cuts is probably a little bit surprising, but also we need to remember it is a recommendation at the moment and they will need to work through this in more detail."
Mr Sala Tenna said he expects other iron ore companies may follow BHP's lead.
"We see it time and time again throughout the cycle that in the good times the miners are very aggressively hiring staff and in the bad times they need to let go of staff," he said.
"We've seen BHP already let go 100 jobs in the Perth head office and there's another 170 cuts made at their Mt Whaleback mine as well.
"So, look this is a process that is probably going to be ongoing and we'll probably expect to see the same at Rio and Fortescue in due course as well."
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