* Construction slated to start by year's end
* Air-quality permit still required from U.S. EPA
* Environmentalists vow to press court challenge (Corrects name of Utah plant to White Mesa Uranium Mill, instead of White River, in 13th paragraph)
By Keith Coffman
DENVER, March 7 (Reuters) - Colorado regulators on Monday gave final state approval for construction and operation of the first new uranium mill in the United States since the Cold War, but the project still faces a court challenge from environmentalists.
The Colorado Department of Public Health and Environment (CDPHE) issued a radioactive materials license to Toronto-based Energy Fuels Inc (EFR.TO) allowing the company to process up to 500 tons of uranium ore per day at the site in western Colorado.
The agency gave the project initial approval in January. But the Sheep Mountain Alliance, an environmental coalition in Telluride, Colorado, then sued the state, claiming Colorado regulators failed to follow federal and state law in permitting the mill.
The group has asked a Denver judge to revoke the license, and the state has filed a motion seeking to have the lawsuit dismissed. A judge has yet to rule in the case.
Energy Fuels said in a written statement that the company has agreed to 16 conditions set by the state for construction and operation of the proposed Pinon Ridge Uranium Mill, which is to be built about 12 miles outside Naturita, Colorado.
Among the requirements is payment of $11 million for environmental remediation work once the plant is de-commissioned. The facility is designed to remain in operation for 40 years.
"With the approval of the (license), Energy Fuels now has both the primary environmental permits needed to operate a uranium mill in Colorado," the company's statement said.
The Montrose County Commission granted its approval of the project in 2009. The project still requires air-quality approval from the U.S. Environmental Protection Agency for emissions of the radioactive gas radon.
Hilary White, executive director of the Sheep Mountain Alliance, said the group will continue to oppose the mill's construction.
"The growing coalition will continue to fight through the federal permitting process, as well as in state court," White said in a telephone interview. "Our goal remains to protect the region's air and water quality."
In announcing its decision, the CDPHE said in a news release on Monday that it conducted a thorough review of the plans and has imposed strict safeguards.
"Conditions cover a range of health, safety, security, and emergency response measures, as well as financial assurance requirements," the agency said.
The agency said it could impose additional requirements to "minimize risks to the public health and safety" from the uranium, the primary fuel for nuclear reactors.
If built, the Pinon Ridge plant would be the first such U.S. facility constructed since the White Mesa Uranium Mill outside Blanding, Utah, opened in 1980. White Mesa is the only active mill in the country.
Uranium ore deposits were first discovered in eastern Utah and western Colorado in the 19th century, but mining and milling of the radioactive element took off in the mid-20th century with demands to supply a growing U.S. nuclear arsenal and commercial atomic energy industry.
Uranium tailings, debris left over from the milling process, have been used as landfill and are still found in many western Colorado communities from indiscriminate disposal of the material during the uranium boom.
Frank Filas, environmental manager for Energy Fuels, said the company hopes to break ground on the $150 million mill by the end of the year.
Editing by Steve Gorman and Bernard Orr