(Adds company comment, vaccine name)

WASHINGTON, June 4 (Reuters) - Danish vaccine maker Bavarian Nordic A/S <BAVA.CO> has won a $500 million contract to make a new-generation smallpox vaccine, the U.S. Health and Human Services Department said on Monday.

The contract calls for the company to make and deliver 20 million doses of Imvamune vaccine to a government stockpile for use in case of a biological attack using the virus.

"To protect ourselves from the remote but extremely grave threat of a deliberate release of smallpox virus, we need vaccines that can be safely given to all Americans, including individuals with weakened immune systems," Health and Human Services Secretary Mike Leavitt said in a statement.

"Acquiring a stockpile of this new smallpox vaccine is a key step toward protecting even more members of the American public against a smallpox release."

Bavarian Nordic said the deal could be worth as much as $1.6 billion if HHS exercised options to purchase up to 60 million more doses and to support additional clinical studies of HIV-infected patients, children and the elderly.

Smallpox, once a global scourge, was eradicated in 1979 after a sustained vaccination campaign.

But the vaccine used then, and still used now, is crude, and can sometimes cause deadly side-effects. Earlier this year an Indiana toddler spent weeks in a hospital with a severe reaction after he touched his father's vaccine site.

The old smallpox vaccine uses a whole live virus called vaccinia. It is related to smallpox and in most people it prompts an immune reaction that protects them from smallpox.

The new virus is a weakened version, called modified vaccinia Ankara, that is less likely to cause side-effects.

"The MVA vaccine could be used in immunocompromised individuals, of whom there are an estimated 10 million in the United States," HHS said in a statement.

"In the event of a possible smallpox outbreak, the 20 million doses (the vaccine is being tested with a two-dose immunization schedule) of MVA vaccine purchased under this contract would be available to them."

Bavarian had announced the smallpox deal in April.

The United States routinely vaccinates military personnel and some health workers against smallpox, but not the general public.

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