(Adds minister, supporter's quotes, details)

BHUBANESWAR, India, May 12 (Reuters) - Two Indian executives from South Korean steelmaker POSCO were released on Saturday by villagers protesting against a planned $12-billion project, police said, after the firm agreed to look elsewhere for land.

Hundreds of angry villagers, some armed with iron bars and sticks had surrounded the officials on Friday when they went to Govindpur village in Dhinkia area to persuade farmers to sell the company land to build a steel plant.

The planned plant would be India's single largest foreign investment project.

The villagers freed the two officials unharmed following an assurance by POSCO that its staff would not visit the area again. Another official was released on Friday after a few hours.

"They are safe and unharmed and consequent to the incident we will proceed with caution from now," POSCO spokesman Shashanka Pattnaik told Reuters from Bhubaneswar, capital of India's eastern Orissa state.

POSCO said the company was ready to "forego" land in volatile areas of Orissa and look for alternate sites.

"It is now up to the district administration to provide us alternative land for the project which is very much on," Pattnaik said.

The state government said it was still serious about pushing the POSCO project, but would consider the South Korean firm's decision not to acquire land disputed by local villagers.

"If POSCO gives us a proposal to remove Dhinkia from its project, the government will consider it," said Orissa state industries minister Biswabhusan Harichandan.

EXPLOSIVE ISSUE

The issue of acquiring farmland for industry in India -- whose economy has been growing rapidly in the past few years -- has become explosive, with farmers in many areas protesting against planned projects that would require agricultural land.

In West Bengal state, which lies next to Orissa, 14 farmers were killed in clashes with police while protesting against a planned chemical complex in March.

POSCO had planned to purchase 200 acres (81 hectares) of land in the Dhinkia area, east of Bhubaneswar.

Some villagers in the area fear their farmland and livelihood would be taken from them.

But villagers supporting the project said if POSCO did not buy land in Dhinkia, it would undermine the logic of the project as the land needed for the plant is largely contiguous.

"The decision to remove Dhinkia out of the project area is a big setback for the company," said Tamil Pradhan, the head of a local pro-POSCO group.

"The company should either take all the land needed for the project or abandon its plan."

Pattnaik said losing Dhinkia would not hurt the project.

The state government says it has a good rehabilitation package, offering cash and a job for at least one member of each family losing its land.

Despite the opposition to its land purchases, POSCO has said it hopes the project's first phase will be commissioned by the end of 2010 as planned.

Clashes between villagers supporting and opposing the project have left dozens injured since March.

Activists say the POSCO project could displace around 20,000 people. The government says the plant will affect only 500 families and create thousands of jobs.

POSCO needs 4,000 acres (1,620 hectares) for its project but has bought just over a quarter of the amount. (Additional reporting by Bappa Majumdar in Kolkata)

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