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By Simon Denyer

NEW DELHI, Oct 26 (Reuters) - India's Supreme Court set new conditions on Britain's Vedanta Resources and its Indian unit on Friday before allowing it to mine bauxite in sacred, forested hills in the east of the country.

Vedanta wants to dig open-cast mines in the Niyamgiri hills in Orissa state to feed an alumina refinery it has already built in the area, as part of an $800 million project expected initially to produce 1 million tonnes of alumina per year.

At an earlier hearing, Vedanta had promised to invest 1.12 billion rupees ($28.4 million) to develop the poor region, but a three-judge bench said it wanted this commitment to be made by the firm's Indian unit, Sterlite Industries.

"What is Vedanta?," the bench said. "Vedanta is not listed in India. So let Sterlite give an undertaking."

Thousands of tribal people say the mine will destroy hills they consider sacred, force them from their homes and destroy their livelihoods, which are based on farming millet, hunting and collecting fruits and spices from the forests.

Environmentalists say the open-cast mine would also wreck the rich biodiversity of the remote hills and disrupt key water sources that supply springs and streams in the area and feed two rivers that irrigate large areas of farmland.

The court asked Sterlite to pay five percent of its annual profits from mining throughout India to the state government to be ploughed into developing the region.

It also asked the company to deposit 500 million rupees with the state government, and specify how many local people would be employed in the project.

The court has asked Sterlite to file an affidavit to this effect, and is expected to give a final order within a month, lawyers said.

ACTIVISTS DISAPPOINTED

"The indications seem more towards it getting clearance," said Ritwick Dutta, part of the legal team opposing the mine.

"I am really disappointed," said Bratindi Jena of ActionAid.

"The court didn't listen to what we were saying," she said, adding that Friday's discussion had been all about money. "These things are really meaningless to us."

Jena said that the survival of the Dongria Kondh tribe was at stake. "At a community level people are so against it."

The state and central government both back the plan, as part of efforts to industrialise and exploit the mineral resources of underdeveloped eastern India.

The Environment Ministry told the court this month that the mining would only affect a marginal amount of forest land.

It also promised "special efforts" would be made to manage and conserve wildlife in the area, which is part of an elephant corridor, shelters leopards and is the only known home in Orissa of the rare golden gecko.

The government said other industrial projects in the area had contributed positively to the life of tribal people, providing direct and indirect employment and other opportunities.

But activists say the largely illiterate tribal people would be unable to make use of cash given as compensation. They have been asked to file their objections to government reports backing the mine before the final court order is delivered.

Tribespeople also say that some villagers have been beaten, briefly imprisoned or threatened with jail by government officials, and tricked into signing land transfer documents.

Vedanta says none of the allegations has been substantiated. ($1=39.48 rupees)

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