Work has already started on the Montes del Plata mill, a joint venture between Finnish paper maker Stora Enso <STERV.HE> and Arauco, a unit of Chile's Copec <COP.SN>, that is due to start operating early in 2013.

Prosecutor Enrique Viana told Reuters on Wednesday he had asked the country's courts to annul the contract signed by the company and the government, saying the document contained legal flaws.

In the filing presented earlier this week, Viana also said the mill would employ "chemical bleaching processes that use substances dangerous for the environment."

The mill is being built in southwestern Uruguay alongside the gigantic River Plate that separates the country from Argentina.

Another Uruguayan paper mill, built by Finnish pulp group Metsa-Botnia, triggered a lengthy dispute between the neighboring countries because of Argentine concerns it would contaminate a border river. 

*Reporting by Malena Castaldi; Writing by Helen Popper; Editing by Gary Hill) (helen.popper@thomsonreuters.com; +54 11 4318 0655; Reuters Messaging: helen.popper.reuters.com@reuters.net)