SAN FRANCISCO, April 6 (Reuters) - A U.S. federal court gave the green light on Friday to a project fortifying one of the world's largest irrigation canals near the U.S.-Mexico border that has caused diplomatic tensions and a legal fight.

Since 1942, the All-American Canal has carried water from the Colorado River 82 miles (132 km) west into California's Imperial Valley. Seepage from the canal also creates underground aquifers that provide ground water to farmers in Mexico's Mexicali Valley.

The U.S.-based Imperial Irrigation District water utility plan a two-year, $200 million overhaul of the canal by laying concrete to stop seepage. It hopes to save U.S. residents 22 billion gallons (83.5 million cubic meters) of water a year.

In 2005, a Mexican community group and two U.S. environmental groups sued to halt the concrete lining plan, presenting a complex array of objections including claims of violations of U.S. laws such as the Endangered Species Act.

In a ruling on Friday, the 9th U.S. Circuit Court of Appeals found no merit in such claims, ending a temporary injunction against the work.

"We conclude that the environmental and other statutory claims are moot and that the district court lacked subject matter jurisdiction over the remaining claims," Sidney Thomas wrote for a three-judge panel. "We vacate the injunction of the project pending appeal."

Mexican environmentalists have warned that the project to update the canal could dry up wells, turn the land arid and drive up salinity levels in Mexico.

The U.S. court noted that disputes over water have a long history in the North American West.

"The legacy of the West is one of continual, and often bitter, controversies about water rights, both above and below the surface," the judge wrote. "In the West, 'whiskey is for drinking; water is for fighting over,' Mark Twain is said to have observed."

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