* Loss-making Ilva plant due to be bought by ArcelorMittal
* High cancer rates reported for years around steelworks
* Government partners split over fate of Ilva
* 5-Star leader takes time to decide next step
By Crispian Balmer
TARANTO, Italy, June 21 (Reuters) - The anti-establishment 5-Star Movement campaigned for years to close Ilva, Europe's largest steelworks which has brought death, environmental disaster and jobs to this corner of southern Italy.
In March, 5-Star emerged as the country's biggest single party in national elections and this month it forged a coalition government with the far-right League, putting it in a powerful position to make good on its promises.
With 5-Star leader Luigi Di Maio named industry minister, plans for the world's biggest steelmaker ArcelorMittal to take over Ilva at the start of July, hung by a thread.
But rather than tearing up the Mittal deal and wielding the axe, Di Maio has begun talks with business leaders, local officials and trades unions.
The discussions point to the kind of compromise 5-Star will have to make with the pro-business League -- which is adamant the plant should stay open -- to maintain their partnership.
"I am being asked to resolve in just two weeks a problem that has been put off for six years. We don't have super powers, but we will do everything we can," Di Maio said on Tuesday.
Much hangs on his decision.
Closing the plant would further weaken Italy's withered southern economy, push up double-digit unemployment, undermine investor confidence in the country and potentially trigger a coalition crisis.
Leaving it open would keep alive a plant that has spewed out a lethal cocktail of carcinogenic dioxins and mineral particles for more than half a century, and outrage 5-Star activists.
"If we go back on our word it will mean that the movement will die. We cannot be that hypocritical," said Rosa D'Amato, a 5-Star European parliamentarian who comes from the city of Taranto in the heel of Italy, which is home to Ilva.
"We have to show responsibility and put an end to an unacceptable health and environmental situation."
Political opponents in the city argue otherwise and pin their hopes on Mittal, which promises to spend more than one billion euros on improving environmental safeguards, while guaranteeing thousands of local jobs.
"Obviously I would prefer my children to grow up far from the chimney stacks, but you have to be practical," said Taranto's centre-left mayor, Rinaldo Melucci.
Ilva took root in the 1960s as part of a government drive to industrialise the impoverished south during Italy's boom years.
At its peak, the plant produced more than 10 million tonnes of steel a year, but magistrates intervened in 2012 and said it had to be cleaned up or shut down. Ilva was placed under state-supervised special administration in 2015.
With a cap imposed to limit harmful emissions, output has fallen to under five million tonnes a year and the company is losing some 30 million euros ($35 million) a month.
Mittal says that with its know-how, it can turn the business around. Besides the 1.8 billion euro cost of acquisition, it says it will invest 1.2 billion to boost productivity and 1.1 billion to curb pollution.
A 2016 report by the regional health authority highlighted the toll Ilva has had on Taranto.
It showed lung cancer death rates were some 30 percent higher than normal in districts near the plant, while deaths from respiratory illnesses were as much as 50 percent above average. Ilva workers were 41 percent more likely to develop stomach cancer and 72 percent more likely to get pleural cancer.
"There isn't a family in all of Taranto that hasn't been touched by the health problem in one way or another. But in recent years, the situation has got better," said mayor Melucci.
Cosimo Briganti has a different view. A resident of the blue collar Tamburi district that backs onto Ilva, he has worked at the plant since 1997 and is adamant it should close.
His father and father-in-law worked at the vast site before both dying of lung cancer, aged 60. In 2011, Cosimo was diagnosed with colon cancer, surviving thanks to months of chemotherapy.
"People say Ilva must stay open because it provides work and puts food on people's plates. But no-one in Italy dies of hunger. What people really need to worry about is whether they or their children are going to die of pollution," he said.
Both he and his wife voted for 5-Star in March, like almost 50 percent of the city -- one of the strongest showings for the movement anywhere in Italy.
"If they go back on their word, we will never vote for them again," said Cosimo's wife, Lucia Lo Martire.
5-Star's European parliamentarian D'Amato says Taranto can be weaned off steel, drawing on EU funds to help lift local fishing, agriculture and tourism.
The party wants to promote a green economy, and has already signalled it will review a $40 billion international gas pipeline meant to come ashore south of Taranto.
At present, animals cannot graze within a 20-km (12.5-mile)radius of Ilva because of pollution, while there are also strict limits on seafood production in the adjacent coastline.
D'Amato predicted that once the "stain" of Ilva was removed, new businesses could generate more jobs than steel.
The League disagrees.
"Ilva must remain productive. I am not going to go there for my holidays," Tourism Minister Gian Marco Centinaio, a League heavyweight, told la Repubblica newspaper last week.
Svimez, an industry group that advocates for southern Italy, said in a report this year that if Ilva is taken over by Mittal and its investment programme is enacted, Italian gross domestic product would benefit by 3.1 billion euros a year.
Trades unions too are mobilising to save the plant, although they also promise war with Mittal over its plans to reduce Ilva's Taranto workforce to around 7,600 from 10,900 now.
Both the unions and the League, from opposite ends of the political divide, argue that without Ilva, Italy's status as Europe's second biggest manufacturing power could be imperilled and warn that production costs will rise for local firms as they have to import more steel.
"To shut Ilva down would be completely crazy ... When you pass from opposition to government you have to show a bit more responsibility," said Rossano Sasso, a League lawmaker from the Puglia region. ($1 = 0.8632 euros) (Additional reporting by Massimiliano Di Giorgio in Rome; Editing by Mike Collett-White)