By Jonathan Barrett

SYDNEY (Reuters) - A move by Australia's biggest mining state to support the industry by handing back funds earmarked for mine rehabilitation has backfired, critics say, with more than 70 projects suspending operations, raising fears taxpayers will be left to pay the clean-up bill.

Western Australia had hoped the $1 billion injection would buffer miners from slumping commodity prices, but the closures underline the risk that a prolonged downturn could lead to hundreds of millions of dollars in unfunded or underfunded liabilities from shuttered mines.

State lawmaker Bill Johnston, who oversees the opposition Labor party's mining policies, said some at-risk miners took the cash return only to collapse or suspend operations shortly after, with the state already facing a $60 million clean-up bill.

"Too much money was reimbursed too quickly and there's a risk that figure will grow and ultimately be passed on to the taxpayer," Johnston said.

Revenue generated from mining - largely iron ore, but also gold and other valuable commodities - was a major driver of state and federal government revenues until metal prices started to collapse in 2013, prompting the cash return.

In exchange, miners now contribute much smaller, annual amounts to a Mining Rehabilitation Fund (MRF), which has raised just $64 million since it was created in 2013.

The subsequent collapse of four mines and the suspension of another 73 - about 10 percent of the state's mines - has raised concerns that too much money previously quarantined for mine rehabilitation was refunded to miners.

"It seems that as we move into the mining downturn, we now have a system that leaves taxpayers with the bill," said state lawmaker Robin Chapple, a Greens politician whose outback electorate covers the iron ore-rich Pilbara.

"In some cases, just months after they got their bond back, they went into receivership."

Commodity price falls have left state governments across the country grappling with how to clean up a mine site when the operator fails and not enough money has been quarantined.

Australia's other major mining state, Queensland, recently introduced laws designed to hold resources companies accountable even when a project fails.

The Western Australia state government and miners defend the new system, saying it frees up much needed capital and creates a fund with money to rehabilitate mines across the state as opposed to a bond system where money is used only on the project holder's site.

State Department of Mines and Petroleum acting executive director, environment, Marnie Leybourne, said the new fund would increase by about $27 million a year to ensure abandoned sites were rehabilitated.

"It is recognized that expenditure from the fund will be required to address the urgent rehabilitation issues, however, this will be managed carefully while focusing on opportunities to re-establish mining," Leybourne said in a statement.

(Reporting by Jonathan Barrett in SYDNEY; Additional reporting by Sonali Paul in MELBOURNE)