By Inae Riveras

SAO PAULO, Aug 5 (Reuters) - Brazil would restrict sugar cane planting in one of the world's largest wetland areas if the government approves a proposal to protect the Pantanal area's ecology, the Environment Ministry said on Tuesday.

The agriculture ministry has been working for a year with state-run agencies on a law to restrict cane planting in the Latin American nation amid concern about the environmental impact of the crop's rapid expansion.

Agriculture Minister Reinhold Stephanes and Environment Minister Carlos Minc met on Monday, and both support the proposal. The final decision rests with President Luiz Inacio Lula da Silva.

"Since it preserves the Amazon and the Pantanal, clearly defining where it can be planted in the latter region, and without cutting existing production, it seems to me that the agreement is good for everyone," Minc said in a statement.

The Pantanal, south of the Amazon basin and east of the Andes mountains, is in a vast river delta where floodwaters rise and fall several meters each year.

The area is "one of our planet's most spectacular wetland systems" containing endangered jaguars, rare Hyacinthine macaws and giant river otters, among other plants and animals, the World Conference on Preservation and Sustainable Development in the Pantanal says on its Web site (http://www.pantanal.org).

No new ethanol plants, which produce biofuel for Brazil's fast-growing fleet of ethanol-powered cars and for export, will be allowed in Pantanal's plains under the proposal, but it will permit restricted planting in the region's highlands.

The proposal would require planters in this region, where cane has been cultivated for more than 10 years, to use direct, or no-till planting methods, eliminating the use of machinery and agrochemicals, the ministry's statement said.

No new mills would be allowed in the Amazon biome, but three plants that already had permits will be allowed to operate.

Stephanes said it was vital the two ministries agree on all aspects of the proposal so it could become law more easily.

Brazil has about 30 million hectares of useable land suited to cane planting, according to the government, adding it would require about 7 million hectares to double Brazil's current ethanol output of around 20 billion liters per year.

About 90 percent of Brazil's sugarcane is produced in the center-south region, which includes Pantanal. But the main producing areas are about 2,000 kilometers (1,250 miles) from the Amazon forest.

(Reporting by Inae Riveras; Editing by Peter Murphy and David Gregorio)

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