"The Prosecutor-General has ordered the (local) Irkutsk region prosecutor to hold a probe into the legality of the Baikalsk Pulp and Paper Combine's operations," the Prosecutor-General's press office said in a statement.

"The said enterprise has been carrying out the illegal issuance of industrial waste with levels of pollutants higher than permitted levels," it said, adding that the plant was using water from Baikal without official permission.

Baikal is a treasure of nature which harbours 1,500 species of animals and plants, including a unique type of freshwater seal, and is surrounded by virgin forest and nature reserves.

The pulp plant was built in the 1960s on the southern tip of the lake, which holds one fifth of the world's total surface fresh water.

The plant is controlled by LPK Continental Management, part of billionaire Oleg Deripaska's Basic Element industrial group. The other 49 percent is owned by the state.

A spokesman for Continental Management said the plant had a new closed water system ready that would stop waste from flowing into the lake.

But he said the new system could not be started up until the local town of Baikalsk dealt with its own waste, as the mill currently treats the town's pollution too and the system would not be able to cope with all of it.

"If we stop the enterprise then Baikal awaits an environmental catastrophe, as all the waste from the local town would go directly into the lake," the spokesman said.

"We are fully ready to launch a closed water loop system that would stop waste from going into Baikal but need the town to build its own system," he said.

President Vladimir Putin in 2006 ordered a giant new oil pipeline to be routed away from Lake Baikal, saying the risk to the lake was too great.

The US Geological Survey says Baikal is the world's biggest freshwater lake, with 23,000 cubic kilometres of water, and is also the deepest and oldest lake in the world.

(Reporting by Guy Faulconbridge; Editing by Catherine Evans)