It was the first EU state to pass such a law, which was steered through parliament by Mariann Fischer Boel, then Danish agriculture minister but now EU agriculture commissioner.

"This is the first case where the (European) Commission has authorised such state aid," the Commission said in a statement. Officials said the amount concerned was a little less than one million euros ($1.18 million).

"The admixture of conventional crops with GM material may cause economic losses to the farmer with conventional crops if his products have to be labelled as containing GM material and he gets a lower price for them," it said.

Danish authorities will first pay out the compensation, and then recover the amount paid from the farmer from whose fields the GMO material has spread.

In line with EU laws on GMO traceability and labelling, compensation will only be granted to farmers if the presence of GMO material exceeds 0.9 percent.

This must also be limited to the price difference between the market price of a crop that has to be labelled as containing GMO material and a crop for which no such labelling is required.

Denmark's law obliges farmers planning to grow GMO crops to pay a fee, per sown hectare, into a fund that would compensate conventional farmers whose crops might become contaminated.

The idea is to replace the compensation fund, due to run for five years, by private insurance when it becomes available.

GMO farmers in Denmark must also inform neighbouring farmers of their plans and ensure mandatory separation distances. But they only have to pay out compensation if the rules are broken.

Environmental lobby group Friends of the Earth (FoE) praised the Commission's approval of Danish state aid but said the law, one of the EU's strictest on coexistence, did not go far enough.

"We welcome the fact that the Commission has approved measures to ensure that organic and conventional farmers will not have to foot the bill for any GMO contamination in Denmark," FoE's GMO Campaigner Clare Oxborrow told Reuters.

"However, the new Danish law does not go far enough to prevent this contamination occurring in the first place," she said. "Biotech companies must be held strictly liable for any damage their products cause."

Biotechnology remains an extremely controversial area for the EU, even after it lifted its unofficial ban in May 2004 on authorising new GMOs by approving a modified sweet maize type to be sold in cans for human consumption.

For many EU countries, especially anti-GMO diehards such as Austria, Greece and Luxembourg, it is essential to clarify the issue of coexistence -- but with EU-wide, not national, laws.