(Updates with health ministry statement)

By Silvia Aloisi

ROME, March 26 (Reuters) - Italy has sealed off 83 dairy farms after finding nearly one in five buffalo mozzarella producers were making cheese with above permitted levels of cancer-causing dioxin, the health ministry said on Wednesday.

Seeking to avert a major health scare over one of Italy's best known culinary products after Japan and South Korea blocked imports, the ministry said special checks were being made to guarantee the safety of the cheese.

Foreign Minister Massimo D'Alema said international alarm was "totally exaggerated and unjustified".

A health ministry statement said checks had revealed levels of dioxin "moderately higher than the limit allowed by European Union regulations" in the mozzarella and milk at 25 out of 130 cheese factories -- a higher incidence than previously reported.

It said that as a result all the 83 dairy farms supplying the producers affected had been sealed off while tests were under way to establish where the contaminated milk came from.

"The measures adopted are intended to guarantee the safety of current production which continues to be subject to additional and extraordinary checks," said the statement, issued after a meeting involving several ministries.

TOXIC CHEMICAL

The sealed-off farms are in the southern Campania region around Naples where officials believe a garbage crisis earlier this year is linked to the higher dioxin levels.

With dumps in the area full, locals burned piles of rubbish in the streets and in open fields. Health officials say industrial waste was also set ablaze, spreading fumes that in some cases contained dioxin, a toxic chemical.

"The presence of dioxin is not due to the garbage itself but to the fact that substances containing dioxin have been burned and the fallout from the smoke brought some dioxin to the ground," Health Ministry undersecretary Gianpaolo Patta said.

"The great majority of mozzarella farms are untouched by this or by other diseases and they are strictly controlled," he told Reuters.

Police in Campania were also investigating whether feed given to buffalo herds, which produce the best milk for mozzarella, was tainted, possibly by gangsters involved in illegal waste disposal.

Some mozzarella shops in Naples on Wednesday were putting up notices saying their cheese was safe.

Japan and South Korea suspended imports at the weekend while the European Union had asked Italy for safety assurances after reports that some of the cheese was made with contaminated milk.

A Japanese health ministry official said Japan wanted the names of the producers affected by the contamination.

"If we could be provided with the names of these firms, we could again allow cheese from the other producers to enter the country," he said.

Buffalo mozzarella, which costs at least twice as much as mozzarella made with cows' milk, is best known abroad for its use on pizza, although purists eat it on its own or with a drizzle of extra-virgin olive oil.

Rolando Manfredini, in charge of food safety at Italy's biggest farmers group Coldiretti, said mozzarella sales at home and abroad may fall 60 percent in the next couple of weeks.

The sector employs 20,000 people in Italy and makes 33,000 tonnes of mozzarella a year, 16 percent of which is sold abroad. (Additional reporting by Miho Yoshikawa in Tokyo, Cristiano Corvino in Rome and Svetlana Kovalyova in Milan; Editing by Keith Weir)

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