UPDATE 1-Key review completed on CN Rail's bid for US line

(Updates with reaction, analyst's comments. In U.S. dollars unless noted)

By Allan Dowd

VANCOUVER, British Columbia Dec 5 (Reuters) - An environmental study of Canadian National Railway's (CNR.TO) bid to buy the Elgin, Joliet & Eastern railroad was released on Friday, which could allow U.S. regulators to rule on the controversial deal by the end of the year.

The report for the U.S. Surface Transportation Board said increased train traffic on EJ&E's existing route around Chicago will "annoy" some residents, but the impact on the communities will not be as bad as critics claim.

It recommended Canadian National pay 15 percent of the cost of separating two grade crossings, which is more than railroads have traditionally been required to pay, but short of what some opponents had wanted.

The timing of the report's release could be as important as its findings.

Canadian National's tentative agreement to buy the EJ&E from United States Steel Corp (X.N) for $300 million expires at the end of this year, but the board had said the environmental review might not be completed until early 2009.

The STB can issue a final ruling on the deal once the report is published in the U.S. government's Federal Register, which is expected to happen on Dec. 12.

Canadian National called the report a "significant step forward" and said it hoped the board will act quickly.

Canadian National operates 32,600 km (20,400 miles) of track in Canada and the United States and wants to use the 198-mile EJ&E to route freight trains around Chicago, where they now face lengthy delays in the congested rail hub.

But the deal unveiled in September 2007 has run into opposition in some communities west of Chicago, where critics complain increased train traffic on the EJ&E will cause safety problems at highway grade crossings and reduce property values.

A coalition of communities against the deal dismissed the environmental report as flawed and said it ignored the views of residents and many Chicago-area lawmakers, including U.S. President-elect Barack Obama.

"It would be a travesty if the STB approved this transaction based on the flawed analysis that is the hallmark of this (study)," the Regional Answer to Canadian National Coalition said.

Independent transportation industry analyst Ed Wolfe said he expects the STB will approve the deal by year's end.

"However, even if STB approval misses yearend by a few weeks, we suspect that U.S. Steel is more desperate to complete this deal now than they were a year ago when it was first announced," Wolfe said in a note to clients.

The report did not put a cost on the proposed environment mitigation, but rejected calls for Canadian National to pay the full cost of separating of grade crossings on the EJ&E to ease highway traffic delays - something CN had warned could make the deal too costly..

Canadian National has already said it will spend $160 million to upgrade the EJ&E, including any mitigation ordered by the regulators. (Reporting Allan Dowd, editing by Peter Galloway)