By David Stanway

BEIJING (Reuters) - China's environment ministry has refused approval for a hydropower dam on an ecologically vulnerable river already damaged by construction, a rare setback for the country's extensive dam-building program.

While the 1,000-megawatt Xiaonanhai project appears scrapped, experts said China's overall plan for dams was on course given pressure to cut smog from coal-fired power plants.

Hydropower capacity is due to rise another 60 gigawatts (GW) in five years as new projects get approved.

The Ministry of Environmental Protection said in a document sent to the Three Gorges Project Corporation and seen by Reuters that the firm could not plan or build the project on the Jinsha river, the upstream section of the Yangtze, in the southwest.

"In the last 10 years, two investigations have been carried out into construction in precious and unique national protection zones for fish in the lower reaches of the Jinsha river, and the structure and function of the zones have already been heavily impacted," the ministry said in the document.

"Your company as well as other units cannot plan or build the Xiaonanhai hydropower plant," it said.

Officials at the Three Gorges Project Corporation were not available for comment and phone calls went unanswered.

Environmentalists said the blocking of a project once championed by the disgraced former Politburo member Bo Xilai reflected a tougher stance on protecting rivers.

"We welcome the decision, particularly the recognition that Xiaonanhai dam would have pushed the Yangtze fish reserve past the ecological red line," said Grace Mang of the International Rivers group.

Final approval for big hydropower plants goes to the State Council, the cabinet, and hydropower advocates questioned the legal basis of the ministry document, an environmental impact assessment of the 10-gigawatt (GW) Wudongde plant, also on the Jinsha river.

"The State Council last year approved an overall development plan for the whole of the Yangtze river basin, and that plan cannot be guaranteed without building Xiaonanhai and other projects," said Zhang Boting, vice-secretary general of the China Hydropower Society.

"If this company doesn't build, then another might have to, because this is a state planning requirement," he said.

China's dam program slowed after completion of the Three Gorges Project, the world's biggest hydropower plant, about a decade ago, with leaders concerned about human, financial and environmental costs.

But with an ambitious nuclear-power program delayed, a greater reliance on hydropower is seen as a good way to cut smog.

An aim to raise total hydropower capacity to 290 GW by the end of 2015 was met a year early, and according to a "strategic energy action plan" last year, capacity will be raised to 350 GW by 2020.

"Emissions-cutting pressures are huge, coal consumption remains really high and if we are to meet this important global responsibility we must have hydropower," said Zhang.

(Editing by Robert Birsel)