India's environment ministry approved on Monday South Korean POSCO's plans for a $12 billion steel mill, a boost for the foreign investment climate in Asia's third-largest economy after several setbacks for big ticket industrial projects.

The long-delayed clearance for India's biggest foreign direct investment (FDI) follows a year in which Environment Minister Jairam Ramesh has blocked several projects, raising criticism he was jeopardizing India's growth story.

India, one of the world's fastest growing major economies, needs foreign capital to boost infrastructure and allow its economy to grow at near double digits. But projects have met with protests from largely poor farmers in this densely populated country.

It's very good news that this issue has now been settled, said Taina Erajuuri, Helsinki-based portfolio manager at FIM India, which owns about $150 million worth of Indian shares.

India, unlike China, is a very difficult country for foreign companies to get approvals, specially environmental approvals. Many foreign companies want to come to India but the country is very bureaucratic, to put it mildly.

The mill in eastern Orissa state has been delayed by criticism it would ruin lives of thousands of poverty-stricken people, who say the plant will disrupt their betel leaf plantations and forest-based livelihoods.

Undoubtedly projects such as that of POSCO have considerable economic, technological and strategic significance for the country, the environment ministry said. At the same time, laws on environment and forests must be implemented seriously.

The ministry attached a series of additional conditions for POSCO, but analysts said they were not major obstacles. A government panel had earlier said there were no ecological concerns over the plant.

POSCO is among several corporations, including Vedanta Resources, which have come under scrutiny from Ramesh, putting his ministry in conflict with others in the government who are pushing for rapid industrialization.

A series of corruption scandals has shaken the government of Prime Minister Manmohan Singh and a recent minor cabinet reshuffle saw several ministers' portfolios change, but Ramesh stayed on as environment minister, indicating his influence.

The ruling Congress party head, Sonia Gandhi, is keen to win over farmers hit by big projects at well as ensuring industrial jobs are created -- a fine line that may have helped create regulatory uncertainty before state elections this year and a general election in 2014.

REGULATORY UNCERTAINTY

While investors tend to shrug off corruption scandals as a risk of emerging markets, regulatory uncertainty threatens to taint India's attractiveness as a destination for foreign firms eager for a slice of its booming $1.3 trillion economy. And the approval granted to POSCO is unlikely to change sentiment.

I don't think there will be a rush of investments or environmental clearances after this (approval), it should still continue to be a slow process, said Andrew Holland, chief executive for equities at Ambit Capital in Mumbai.

FDI in India fell 27 percent to about $14 billion in the current fiscal year through November, dragged down in part by delays in big investments. The central bank has also raised concern about the regulatory environment.

China, whose economy is almost four times bigger than India's but which Delhi regards as its regional rival, drew a record $105.7 billion in FDI in 2010.

In October, Ramesh threw out plans by London-listed Vedanta to expand its alumina refinery over worries it would destroy a hill considered scared by tribal peoples.

But this month, he said he was willing to conditionally reconsider Vedanta's expansion plan, and the ministry also said it could consider approving Hindustan Construction Co's ambitious Lavasa project, a $31 billion town proposed to be built in a forested area near the city of Pune.

A back-and-forth on whether to ban iron ore exports in the Karnataka state has also worried investors. ArcelorMittal, the world's top steel maker, has also faced years of delays in building several plants in India.

Approval for the POSCO mill would see the Orissa government immediately starting to acquire land for the world's third-largest steelmaker's project.

The decision will help us proceed with the stalled project, as it will allow us to resume land acquisition among other things, said a POSCO spokesman in Seoul.

POSCO still faces a series of hurdles that could delay the project, such as a court case filed by a local firm against the Orissa government, contesting its decision to grant a mining concession to the South Koreans.

India, which has not yet been able to exploit its potential as a natural resources-rich country, is keen to boost its trade and political ties with South Korea while Seoul looks to tap into the $150 billion Indian nuclear power market.

Direct investors -- companies building factories or power plants or buying local firms -- often have less flexibility and more to lose than fund investors and are especially sensitive to regulatory uncertainty.

Leading global companies such as Wal-Mart Stores, Vodafone and POSCO have been frustrated for years in their efforts to negotiate regulations in a promising but perilous market, and FDI has suffered.

(Additional reporting by Krittivas Mukherjee in NEW DELHI, Sumeet Chatterjee and Prashant Mehra in MUMBAI and Miyoung Kim in SEOUL; writing by Paul de Bendern; Editing by Alistair Scrutton and Miral Fahmy)

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