* Says proposed mine would have damaged environment
* Taseko shares drop 25 percent in post-market trade (Adds comment from First nations group)
OTTAWA, Nov 2 (Reuters) - The government of Canada has decided to block the development of Taseko Mines' (TKO.TO) controversial copper-gold mine in British Columbia, Environment Minister Jim Prentice said on Tuesday.
Ottawa's decision -- based on "concerns about the significant adverse environmental effects" -- overrules British Columbia's provincial government, which had granted permission for the Prosperity project to go ahead.
The news hammered shares of Taseko Mines, which fell 25 percent to $4.89 in after-market trade in the United States.
Steve Parsons, an analyst with Wellington West, said Ottawa's ruling is a major blow to Taseko that potentially diminishes the value of the company.
"I can tell you what's left in the company and the value of that we estimate is C$4.85 a share ... It (Taseko) could trade at a slight discount to that," said Parsons.
The company could submit a revised proposal, said Prentice, adding that he agreed with a federal review panel's report which warned that the proposed project would destroy a nearby lake and the local ecosystem.
"(The report) was scathing in its comments about the impact on the environment. It was, I would say, probably the most condemning report that I've seen," Prentice told a hastily convened news conference in Ottawa.
Taseko said it plans to fully evaluate the federal government's decision on the project.
"We are extremely disappointed by this decision," Chief Executive Russell Hallbauer said in a statement.
"Our next steps will be discussions with both the federal and provincial governments to look at options so that this mining project can move forward and meet the criteria that the federal government deem appropriate."
Local aboriginal groups have opposed the mine, saying it would infringe on their rights.
"We hope today's decision will demonstrate the need to find a way forward for industry and governments to work with First Nations from the outset to identify and develop projects that are environmentally and culturally acceptable," said chief Marilyn Baptiste of the Xeni Gwet'in First Nation, in a statement.
The project, a conventional open-pit mine located about 125 km (80 miles) southwest of Williams Lake, British Columbia, was expected to have a 20-year operational life with a production capacity of 70,000 tonnes of mineral ore per day.
The provincial government gave its approval to the project in January, saying the mine would not have a significant adverse environment impact apart from the loss of a lake, which would be replaced with a newly built lake.
But native opponents said Teztan Biny, or Fish Lake, was critical to their culture, and federal fisheries officials had warned the project's backers years ago to find an alternative way to dispose of the mine's tailings.
Provincial officials had also praised the potential economic impact of opening a new mine in a region hit hard by a severe downturn in the forest industry.
Prentice also said Ottawa had approved Thompson Creek's TCM.TO Mt. Milligan copper-gold project in central British Columbia. The molybdenum miner acquired the project when it bought exploration company Terrane Metals earlier this year. (Reporting by David Ljunggren, Euan Rocha and Allan Dowd; editing by Rob Wilson and Jim Marshall)