* Malaysian residents challenge Lynas rare earth license
* Court action may delay June 2012 start-up
* Residents worried plant may contaminate environment, Lynas says safe
By Sonali Paul and James Regan
MELBOURNE, Feb 23 (Reuters) - A legal challenge launched in Malaysia against Australia's Lynas Corp threatens to delay one the world's few new major sources of rare earths aimed at alleviating China's stranglehold on global markets.
Residents in Malaysia's Kuantan area have launched court action to force the government to review its decision to grant Lynas a temporary operating license to start a rare earths processing plant in June 2012, Lynas said on Thursday.
The plant has been under construction in eastern Malaysia since 2010. Malaysian residents and local politicians say they are worried that radioactive waste from the plant could contaminate the environment.
Lynas says its plant is safe and is not comparable to a rare earths plant in Malaysia that was shut by a unit of Mitsubishi Chemicals in 1992 after residents there blamed the plant for birth defects and a high number of leukemia cases.
"While Lynas respects the concerns of members of the community, it does not believe that there is any basis for the claims made in the proceedings," it said in a statement to the Australian stock exchange.
"Lynas will take the necessary steps to vigorously protect its interests in relation to the orders sought in the proceedings."
China's decision in 2010 to reduce exports of rare earths by 35 percent to safeguard domestic supplies has triggered a global race to find new sources. China did supply up to 97 percent of the world market in past years.
Rare earth elements are group of 17 metals essential in electronic devices found in everything from Apple's iPhone to Ford's Focus hybrid, as well as in defense applications and oil refining.
Japan is the world's biggest consumer of rare earths and is counting on Lynas to supply 8,500 tonnes a year by early 2013 to curb its reliance on China, under a deal involving trading house Sojitz Corp and state-run Japan Oil, Gas and Metals National Corp.
Lynas expects to process up to 22,000 tonnes of rare earths annually, or about 20 percent of the world market, through its Malaysian plant.
Malaysia's Atomic Energy Licensing Board approved a two-year operating license for Lynas in early February, on condition it would submit a detailed plan for a permanent disposal facility for waste from the plant within 10 months.
The Malaysian plant is being designed to process rare earths dug from Lynas' Mount Weld mine in Australia.
Ian Chalmers, managing Director of Alkane Resources said it would be at least a year before the effects of any delay to the Lynas facility reverberated into markets for rare earths.
"If Lynas gets stalled for 12 months, I don't think it will have a big impact because the market has already factored in that supply is going to be disjointed until they become a steady source," Chalmers said.
Alkane has been operating a pilot processing plant in Australia since 2008 as it gets ready to mine its own lode of rare earths by the middle of the decade.
In the United States, Molycorp has already started mining new ore at its Mountain Pass mine and expects to be producing rare earths at rate of 19,050 tonnes a year by the end of the third quarter.
Prices for most rare earths have retreated from historic highs in mid-2010 when China first cut exports.