South Korean steel giant Posco scrapped Tuesday a $5.3-billion deal to build a steel plant in India due to delays, in a blow to New Delhi's efforts to woo investors.

The company said it was dropping the project in the southern Karnataka state because of problems in obtaining mining rights and vociferous opposition from local residents.

"This is an example that doing business in India is tough," said Sonam Udasi, head of research with IDBI Capital.

Posco, the world's fourth-largest steelmaker by output, signed an initial agreement in June 2010 for the project but has faced big protests from farmers.

Industrialisation has been long championed by economists as a way to pull tens of millions of Indians out of poverty.

But acquiring land for factories, roads, housing and other projects has created sometimes deadly battlegrounds with many farmers complaining they have been forced to sell at below market rate and robbed of their livelihoods.

Posco's India chairman Yong Won Yoon said the company was pulling the plug on the project -- set to produce six million tonnes of steel per year -- "given market conditions and significant delay in acquiring the required land".

Posco's announcement comes as it is contending with a sharp downturn in the steel market due to weak international economic conditions.

Posco said it remains committed to a separate $12-billion steel plant project in eastern Orissa state, touted as India's biggest single foreign direct investment.

That project, initially agreed in 2005, also is mired in delays due to environmental concerns and local opposition.

In a March a bomb blast killed three people involved in protests against the project and residents say the mill would interfere with their traditional forest-based livelihoods and uproot them from their homes.

There have also been clashes over proposals for the creation of Special Economic Zones, a major thrust of the country's industrialisation drive.

The halted Karnataka project could reinforce concerns about the difficulties in purchasing agricultural land for development, seen as a major barrier to India's industrial expansion.

Rakesh Valecha, senior director at Fitch group firm India Ratings, said it was too early to say how foreign sentiment might be affected by the Posco move.

But he said it was clear "policy framework for the steel sector needs to be streamlined. along with land acquisition and mining allocation laws," he told AFP.

When setting up plants, companies usually lease land from state governments that acquire the plots because of the complicated nature of land purchases in which securing title is notoriously difficult.

Earlier this year, the government drafted a land acquisition bill to better reward landowners whose property is bought for industrial development.

The legislation includes resettlement and new skills training for people whose land is acquired as India industrialises in its quest to create more jobs for its youthful 1.2-billion population and help lift millions out of poverty.

Consensus on the bill aimed at replacing an act drawn up under India's British colonial rulers has so far eluded lawmakers.

The government, however, has said it will present the legislation in the next session of parliament due to begin in August.