India on Monday gave final clearance to South Korean giant POSCO's proposed $12 billion steel plant in a deal seen as a test of the country's openness to foreign investment.

The plant — one of India's biggest foreign projects since the launch of market reforms in 1991 — has faced fierce opposition from locals in Eastern Orissa state campaigning to save farmland and forests.

The environment ministry, which gave permission for the plant to be built in January, had stipulated that the Orissa government should investigate claims by locals who could be forced off their land.

Environment minister Jairam Ramesh said Orissa authorities had dismissed the claims and therefore "final approval is accorded to the state government" to give 1,253 hectares (3,100 acres) of forest to POSCO.

Under India's federal system, "faith and trust in what the state government says is an essential pillar," Ramesh said, although he noted Orissa's state government had been "actively canvassing" on behalf of the POSCO proposal.

Indian law stipulates no forest land can be cleared without the approval of people who stake claim to the land.

The POSCO deal, originally announced in 2005, had been keenly watched as a test case for foreign investors eager to enter the fast-growing Asian economy but wary of the potential for environmental concerns to derail their plans.

Giant steelmaker ArcelorMittal, controlled by Indian billionaire Lakshmi Mittal, has also found itself unable to acquire land for a proposed plant in eastern India.

Ramesh said the approval was conditional on POSCO regenerating an equal area of forest in an area decided by Orissa, as well as paying for the land.

The plant had "considerable economic, technological and strategic significance," the minister said, adding "at the same time, laws on the environment and forests must be implemented seriously."

Ramesh, who has earned a reputation as a green crusader for blocking investment projects, said on Monday he believed 60 conditions imposed on POSCO would protect the ecology and livelihoods.

Madhuresh Kumar, national organiser for the anti-POSCO national alliance of people's movements, called the government's decision "deeply unfortunate".

"The government is neglecting its own committee reports on the project and granting clearance. The decision is completely illegal and unconstitutional," Kumar said.

Officials at POSCO welcomed the approval.

"It has been a long wait for us, but we followed the law of the land diligently, and had the full support of the state government," Vikash Sharan, spokesman for POSCO India, told AFP.

Industrialisation has long been championed by the government as a way to drive growth and pull millions out of poverty, but land acquisitions have often created battlegrounds between local groups and companies.

The environment ministry has in recent months delayed or denied permission to several industrial projects, especially in mineral-laden, forest-rich eastern India.

The POSCO approval comes after India saw foreign direct investment decline sharply last year. The country's central bank blamed that in part on "environment-sensitive policies" that affected investor sentiment.

At the same time, Ramesh imposed an additional condition, saying POSCO should not export iron ore from the plant.

India has been seeking to stop firms from exporting raw materials as the local steel industry is rapidly increasing capacity to supply the fast growing economy.