An Indian tribunal has suspended the environmental licence for Korean group Posco's $12 billion steel project in the eastern state of Orissa, the country's biggest foreign direct investment, in a fresh blow to business confidence in Asia's third-largest economy.

"The National Green Tribunal has suspended the environment clearance," environmental lawyer Ritwick Dutta with activist group Green Panel said.

South Korea's Posco signed the agreement for the mill in 2005 and was scheduled to begin production by the end of 2011. Protests, environmental concerns and government inquiries into alleged illegalities at a related mining concession have delayed it.

Posco spokesman Chung Jae-woong in Seoul said he could not immediately comment on the ruling and it was not clear if the company would appeal.

Posco said it had received no official notification of the court's decision.

Foreign firms vying for a place in one of the world's fastest-growing markets have been rattled by a series of decisions and policies governing investment in recent months, including the cancellation of more than 100 telecoms licences by India's Supreme Court hearing a corruption case.

The setback for the South Korean steelmaker, the world's third largest, came just days after India's Prime Minister Manmohan Singh told a group of chief executives in Seoul his country was a stable location for their money.

Environmental groups have long complained that Posco's plant would destroy large areas of forest in the poor state and would hurt the livelihoods of indigenous tribes in the area.

Dutta said there were serious discrepancies in the way the government issued a conditional approval for the project last year.

The company said it would build a 12 million tonne-per-year mill. Dutta said that was three times the size of project approved by the environment ministry.-Reuters