* Law legalizes ownership in area bigger than France

* Gov't says will bring social justice, legality

* Environmentalists say it legalizes land-grabbing

SAO PAULO, June 26 (Reuters) - Brazilian President Luiz Inacio Lula da Silva signed into law a bill that will grant titles in huge chunks of the Amazon rain forest to people who have been living on plots illegally for years.

As a concession to environmentalists, who strongly criticized the law as legalizing land-grabbing and encouraging deforestation, Lula late on Thursday vetoed articles of the bill that would allow companies to take over land.

Over three decades, settlers, farmers and speculators have occupied, stolen and sold state land they did not own, fueling the destruction of about a fifth of the world's largest rain forest. Land titles are often nonexistent or fake.

The government says that granting ownership to residents of these areas will reduce illegal land trade and make it easier to police the rain forest. It says the law will also benefit impoverished peasants who were encouraged to settle the Amazon during the 1964-85 military dictatorship but were never provided with legal support, public security or financial aid.

The new land owners, who will have to pay taxes and follow environmental regulations, are expected to help environmental regulators crack down on squatting and deforestation, as well as fund better enforcement efforts in remote Amazon areas.

The law will likely hand over ownership for 67.4 million hectares (166 million acres) in the Amazon, an area bigger than France, to individuals who can prove they have been occupying the public land since December, 2004.

The distribution of plots will be based on good faith affidavits by claimants that they occupy an area. Authorities will not carry out on-site checks of such claims on plots under 400 hectares (990 acres).

Environmentalists, who often criticize Lula for siding with development rather than conservation in the world's largest rain forest, say those are among the flaws in the bill that make it ripe for abuse.

To receive title for plots between 400 and 1,500 hectares (1,000 to 3,700 acres), occupants will have to pay market price for the land, which will be defined by the National Land Reform Institute. (Reporting by Reese Ewing; editing by Stuart Grudgings and David Storey)

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