WELLINGTON, July 30 (Reuters) - Genetic modification (GM) holds promise as a way of conquering disease and wiping out pests but it is risky and should be rigorously tested on a case-by-case basis, a New Zealand government inquiry recommended on Monday.

The NZ$6.2 million (US$2.6 million) inquiry rejected the idea of a GM-free New Zealand by recommending a loosening of curbs on low-risk GM applications, but also sought a toughening of rules on high-risk ones. "It would be unwise to turn our back on the potential advantages on offer, but we should proceed carefully, minimising and managing risks," the report into the controversial and wide-ranging topic of genetically modified organisms (GMOs) concluded. The middle ground outcome disappointed anti-GM campaigners but was welcomed by scientists who support trialling GM products outside laboratories under conditions to be set by authorities. The report did not give details of the conditions, crops to be trialled, or what it saw as low and high risk applications. Calling the inquiry the first of its kind in the world, Prime Minister Helen Clark said that the government's initial response to the report would be released by August 31, when a moratorium on field trials or the release of GMOs into the environment ends.

A final response would be released by November. She said the commission had taken a careful and cautionary approach in melding many views into a measured document. "I would not see this as a fence-sitting report,"Clark told reporters.

IMPROVED PRODUCTS OR FRANKENFOODS?

Around 42 percent of New Zealand's NZ$31.5 billion of annual exports involve food, and anti-GM activists argue the country should sell itself as free of genetic engineering. Scientists around the world are modifying the genetic make-up of agricultural products to improve their resistance to pests, disease and weather, or to increase crop yields.

Anti-GM activists say that gene research, while appropriate for finding new medicines, creates "frankenfood" and endangers the environment and the food chain. The NZ Life Sciences Network, which supports genetic engineering research, said the study endorsed the status quo and that there was no reason for the moratorium to be extended, as called for by anti-GM campaigners.

"The commission's report is a ringing endorsement of the regulatory structures we have in New Zealand,'' network chairman William Rolleston said. But the New Zealand Green Party, which pressured the government to hold the inquiry, said the report had "chickened out" on key issues and was extremely disappointing.

Anti-GM activists and environmentalists rallied in 42 New Zealand towns and cities last week to press for a ban on GMOs and to market the country as a "clean and green" food producer. "Despite all their nice words about keeping New Zealand's options open, the commission has recommended a faster path to the field release of GE (genetically engineered) crops than we had before -- destroying our current market advantage of guaranteed GE-free exports," Green co-leader Jeanette Fitzsimons said in a statement.

The report recommends setting up two new state agencies -- a Bioethics Council to examine social and ethical GM-related issues, and a Parliamentary Commissioner on Biotechnology to audit existing approval rules. ($1 - NZ$2.43)

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