By Julie Gordon

(Reuters) - A Canadian start-up wants to turn an empty chocolate factory in eastern Ontario into a production facility for medical marijuana, a possible boost for a local economy that has been hurting since the landmark Hershey plant shut down in 2008.

The old factory, which for decades churned out Hershey chocolate bars, has been conditionally sold to a start-up called Tweed Inc, which plans to use about a third of the 470,000 square foot plant to grow medical marijuana.

"It's an exciting opportunity," said Mark Zekulin, Tweed's vice president of community engagement. "There is a demand and there's good opportunity in this market."

Tweed Inc has applied to Health Canada for a permit to grow medical marijuana at the factory in Smith Falls, Ontario, some 350 km (220 miles) from Toronto. It will distribute its product to patients across Canada who have permission to use the drug.

Canada legalized medical marijuana in 2001, authorizing an initial 500 people to grow and smoke the drug. That number has since ballooned to about 30,000, causing headaches for those who regulate and police marijuana use.

The government earlier this year responded with a plan to take legal production out of private homes and license private companies to produce medical marijuana for authorized patients.

Hence Tweed's efforts to get into the legal growing and distribution game. The company, which expects to hear back from regulators soon, plans to spend about C$1.5 million ($1.45 million) retrofitting the old chocolate factory. Once up and running, the plant will employ about 100 people.

It's a glimmer of hope for the town of Smith Falls, which has so far embraced Tweed's growing plan.

"In the last five or six years, we've lost 1,700 jobs," said Dennis Staples, mayor of the town of 9,000 people. Expressing hope that Tweed's investment could trigger other jobs, he added: "This announcement by Tweed Inc is welcome news for us."

Most of those jobs losses were at the Hershey plant, but the closure of a few other local businesses and a provincial facility also cut jobs.

($1 = 1.0332 Canadian dollars)

(Reporting by Julie Gordon; Editing by Janet Guttsman and Andrew Hay)