Blow for India's $12bn South Korean steel deal

India's demand for steel is growing along with the economy

An Indian government panel has recommended that environmental clearances for a steel plant to be built by South Korean company Posco be scrapped.

The $12bn plant in Orissa is India's largest foreign investment project.

Critics of the project say it will exhaust iron ore deposits in 20 years.

India earlier rejected plans by mining giant Vedanta to extract bauxite in eastern Orissa state saying it would damage the local environment.

A panel of India's environment ministry has been investigating to see if Posco's project has been complying with the country's green law, including rehabilitating and resettling local people displaced by it.

Three out of the panel's four members have now recommended that environmental clearances for the project be cancelled, saying there are flaws in the manner in which it is being implemented.

The panel's report is not final, but could have an influence on the eventual outcome and at the very least, delay it considerably, says the BBC's Sanjoy Majumder in Delhi.

Posco said it still wanted to go ahead with the project.

"We, of course, want to proceed with this project. We are now watching closely the development. We will withhold any further comment until the environment ministry makes a final decision," a company spokesman told AFP news agency.

The project was conceived in 2005 and is India's single biggest foreign investment.

Based in the port city of Paradip, it was expected to create nearly 50,000 jobs.

But it has been opposed by many groups who argue that Posco will exhaust Orissa's iron ore resources in two decades while creating lasting environmental damage.