The bank's International Finance Corp. (IFC) and Multilateral Investment Guarantee Agency (MIGA) said the $1.7 billion project complied with their environmental and social standards.

The boards, which are made up of member governments of the World Bank, including both Uruguay and Argentina, have the final say over the project.

"The decision to proceed was based on an extensive due diligence process, which included the conclusive and positive findings of a cumulative impact study and a subsequent review of the study undertaken by independent experts," the agencies said.

The proposed pulp mills have sparked protests in Argentina, where government and environmental groups complain they will contaminate the Uruguay River and harm tourism.

Argentina's Environment Secretary Romina Picolotti recently accused the IFC of negligence and fanning tensions between the South American neighbors.

An independent study released last week said the two mills would unlikely cause long-term environmental damage.

The IFC has proposed providing $170 million in loans for one of the mills, to be built by Finland's Metsa-Botnia , while MIGA is considering political risk insurance for the project of around $300 million.

The IFC said the project would have a significant impact on Uruguay's economy and generate revenue equivalent to 2 percent of the country's gross domestic product and more than 8 percent of its annual exports.