* Recommends UK exploration resume with proper monitoring
* Firms would use "traffic light" tremor warning system
* Could boost infrastructure investment, carbon goals -CBI (Adds responses from Institute of Mechanical Engineers, CBI and Greenpeace, updates link to factbox)
By Alessandra Prentice
LONDON, April 17 (Reuters) - A UK government report on Tuesday backed the exploration of shale gas, which has transformed the U.S. energy market, nearly one year after temporarily banning the drilling method because it had triggered two small earthquakes in Britain.
An expert report commissioned by the government said it was safe to resume fracking, in which pressurised water and chemicals are pumped underground to open shale rocks and release trapped gas, but with tighter rules on seismic monitoring and drilling surveys.
"The risk of seismic activity associated with hydraulic fracking operations is small, and the probability of damage is extremely small. We suggest fracking can continue under our recommendations," one of the report's authors, the British Geological Society's Brian Baptie, said at a briefing.
Activists on both sides of the Atlantic have lobbied politicians to ban hydraulic fracturing also on environmental concerns, including the dangers of pollution of ground water and leakage of gas into the atmosphere. The report did not address those concerns.
The energy ministry is inviting public comment on the report's findings over the next six weeks, after which it will issue its final ruling on the future of UK shale gas exploration.
The experts published their findings after reviewing a series of post-earthquake studies published by Cuadrilla Resources, a UK firm that was forced to halt operations near Blackpool in northwest England after fracking triggered tremors in May 2011.
They also recommended the use of a "traffic light" control system, in which operations are suspended if a red light indicates seismic activity at a threshold of 0.5 or above, well below a level that could cause structural damage on the surface.
The tremors measured near Blackpool last year reached a level of around 2 .
UK engineers welcomed the report's safety recommendations, and the "traffic light" warning system in particular.
"These proposed precautions are a good example of how to help mitigate the risk of any damage caused by seismic activity as a result of shale gas activity," Tim Fox, head of energy and environment at the Institution of Mechanical Engineers, said in a statement.
While the experts agreed with Cuadrilla's studies as a whole, they also said there was not enough data to confirm the company's claim that it was unlikely similar earthquakes would recur.
Environmental group Greenpeace said the support for fracking to go ahead was "bad news", saying hydraulic fracturing could pose a threat to efforts to diversify away from fossil fuels.
"This would ... be a major blow for the British renewable energy industry, which would see investment hijacked by a new dash for gas," Joss Garman, Greenpeace's senior energy campaigner, said.
France, which has some of Europe's largest shale gas reserves, last year banned the use of fracking on worries about environmental damage.
However, shale gas exploration is seen by some as a positive force in the battle against climate change since the gas releases less carbon into the atmosphere than coal when used to produce electricity.
"Provided safety standards are observed, shale gas could unlock significant new infrastructure investments, help meet our carbon reduction goals and create many new jobs around the UK," a representative of the Confederation of British Industry said in response to the government's fracking report.
In the UK, Cuadrilla has said its site near Blackpool had 200 trillion cubic feet of gas in place, enough to cover UK demand for generations, although experts have cast doubt on the claims.
In the United States the exploration of shale gas has pushed gas prices to 10-year lows, and companies such as Cheniere Energy are gearing up to export the excess fuel.
British gas prices would also come under increasing pressure if UK shale gas exploration were to take off, a representative of British energy supplier npower wrote on the company's energy blog. (Editing by Karolin Schap and Jane Baird)