By Tim Cocks

KAMPALA, May 26 (Reuters) - Uganda's government has scrapped plans to convert thousands of hectares of rainforest on an island in Lake Victoria into a palm oil plantation, the environment minister said on Saturday.

President Yoweri Museveni has faced intense opposition, including violent protests, over proposals to give private firms the right to bulldoze protected forests to create farms.

The government said it could not license Kenyan company Bidco to plant palm in what is now a protected forest on Bugala island. Days earlier, Uganda also suspended a separate proposal to give a chunk of mainland forest reserve to a sugar grower.

"They have got to look for alternative land," Environment Minister Maria Mutagamba told Reuters.

Mutagamba said the National Forest Authority had blocked the license. Former NFA boss Olav Bjella quit last year over the issue, after coming under government pressure.

In April, three people were killed in a protest against government plans to give 7,100 hectares of Mabira Forest, a nature reserve since 1932, to Mehta, a private a sugar producer.

Like Mabira, Bugala island is home to rare species of plants, monkeys and birds that conservationists say are of high value. Bidco Uganda director Kodey Rao told Reuters the company never wanted rainforest.

"We never asked for the reserves, neither are we interested in taking forest reserves," he said. "The government is supposed to give us land. We signed, so we are waiting for that land."

Bidco has already planted 4,000 hectares on Bugala, mostly on land from which non-protected rainforest was bulldozed, but it needs 2,500 hectares more.

A private letter from Mutagamba to the cabinet in January shows Bidco was concerned the project would "jeopardise the loans they were processing with ... financing agencies due to ... negative publicity."

Palm oil crops have been hailed as a new biofuel to help trim the world's dependence on fossil fuels and fight carbon dioxide emissions blamed for global warming.

But environmental groups say big palm producers such as Malaysia and Indonesia are clearing millions of hectares of carbon-storing rainforest to make way for their plantations.

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