HELSINKI - Finland's UPM-Kymmene, Metso and Fortum said on Monday they could start making wood-based bio-fuel by 2012, seeking to tap growing demand for green energy.

At the end of next year, if we see that the financial basis is sound, we could make an investment decision, after which building will take a few years, and production would be started at the earliest in 2012, Petri Kukkonen, head of Biofuels at Finnish paper maker UPM, told a news conference.

UPM, engineering group Metso and the Technical Research Center of Finland started a pilot project to produce bio-fuel from forestry sector biproducts this year. Fortum said on Monday it would join the project.

We see bio-oil as a very promising, CO2 neutral alternative to replace fuel in heat production ... an option which is financially very interesting, Fortum's strategy and research head, Maria Paatero-Kaarnakari, said.

UPM's Kuukkonen said if the firm had production at each of its seven plants in Finland, annual output could reach 400,000 tonnes of bio-fuel, which is seen primarily as a substitute for fossil fuels in energy production but could also eventually be a raw material for biodiesel.

We also want to investigate the possibility to further refine the product into a fuel product for traffic ... but it will take a few years before that can be done, and there are big challenges ahead, Kukkonen said.

The firms, which declined to quantify investments or speculate on profitability, said costs to set up the pilot plant in the city of Tampere -- with daily production of 7,000 liters -- totaled around five million euros ($7.5 million).

(Reporting by Eva Lamppu; editing by James Jukwey)

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