* Ottawa expects to replace nuclear reactor supply by 2016 * Only Canadian source of isotopes is aging reactor * Ottawa funding cyclotron, linear accelerator technologies * Canada wants private sector to run Chalk River plant By Randall Palmer and David Ljunggren OTTAWA, Feb 28 (Reuters) - Canada expects to be able to make enough medical isotopes through non-nuclear methods by 2016 to replace those now produced by an aging reactor and better assure an uninterrupted supply for medical imaging, a government minister said on Thursday. To that end, the federal government will fund three research institutes developing cyclotron and linear accelerator technologies for production of isotopes on a commercial scale, Natural Resources Minister Joe Oliver said. Canada's only current source of the isotopes is a problem-plagued reactor at Atomic Energy of Canada Ltd's facility at Chalk River, Ontario. The reactor is licensed to run until 2016. "Our challenge now is to prove that cyclotron and linear accelerator production can be commercially viable. ... We envision a future where isotope production will no longer require highly enriched uranium - a weapons-grade material," he said. The government will give a total of C$25 million ($24.3 million) to the three facilities for this goal. Asked if there would be a gap between the end of production by the Chalk River reactor and the supplies from the other sources, Oliver said he did not think so, since the technology was proven and what remained was commercialization. "That's been worked on for a while," he told reporters after making the announcement. "It's reached a fairly robust stage right now. We're talking about increasing the amount ... and we're comfortable we can meet those objectives by 2016." Oliver also announced Canada wanted a private operator to run the Chalk River facility, a move that would take two years to accomplish. The temporary closure of the Chalk River reactor for safety reasons in 2007 and then again from May 2009 to August 2010 caused a medical challenge and a political furor as the government scrambled to find isotope replacements internationally. The closures dealt a blow to Nordion Inc, which as a major supplier of isotopes relied on Chalk River. Nordion spokeswoman Tamra Benjamin said the company expected to receive isotopes from Chalk River until 2016. She said Nordion was looking for alternative long-term supplies and is not interested in owning the reactor. Shares of Nordion were up nearly 3 percent in afternoon trading in Toronto at C$7.20. "This (isotope business) gets a lot of attention but it doesn't make up that much of our valuation of the company," said Morningstar analyst David Krempa, adding that Nordion's sterilization business is its most valuable. AECL had built two more modern prototype reactors to make isotopes but eventually mothballed them after a series of problems. An arbitration panel last year rejected Nordion's claim for damages against AECL. Oliver said the government was not seeking to close down or sell the Chalk River nuclear laboratories. In October 2011 Canada sold AECL's Candu nuclear reactor division to a subsidiary of SNC Lavalin Group Inc.