(Adds agriculture ministry report and new construction rules in paragraphs 6-9)

BEIJING, June 13 (Reuters) - China, where hundreds of millions lack regular access to drinking water due to drought and pollution, plans to build a huge sea water desalination plant south of Shanghai, state media said on Wednesday.

Adding to widespread drought, factories have ignored pollution hazards and dumped toxic industrial waste into rivers and lakes in China, home to one-fifth of the world's population but only 7 percent of its water resources.

In late May and early June, the country's third-largest lake, Lake Taihu in the eastern province of Jiangsu, was struck by a foul-smelling canopy of algae. It made tap water undrinkable for more than 2.3 million residents of the city of Wuxi and prompted a run on bottled water.

The desalination plant, to be built in the neighbouring province of Zhejiang, awaits final approval from the National Development and Reform Commission.

It would be the country's biggest in terms of processing capacity. The largest by size is currently under construction in the northern city of Tianjin, which also lacks adequate supplies of drinking water.

China's Ministry of Water Resources added that it would no longer sign off on building projects on marginal lands, such as steep slopes or other areas which often suffer landslides.

Pollution also affects China's fish stocks, according to a report from the Ministry of Agriculture and State Environmental Protection Agency, though it said the situation last year was generally stable.

Cadmium, copper and lead pollution all affect stocks in the seas around China, while nitrates and phosphates pollute inland waterways, it said in the report carried on the agriculture ministry's Web site (www.agri.gov.cn).

It said last year there were 1,463 pollution "incidents" affecting Chinese fisheries which cost the industry a total of 3.64 billion yuan ($477.3 million).

China is also investing billions in a project to transfer water from its lush south, currently suffering devastating floods, to the arid north. ($1=7.625 Yuan)

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