UPDATE 1-Canada seeks new non-nuclear ways to make medical isotopes

* Ottawa funds three institutions researching isotope output

* Only Canadian source of isotopes is ageing reactor

* Goal is to have isotopes from alternative sources by 2016

* Canada wants private sector to run Chalk River plant

OTTAWA, Feb 28 (Reuters) - Canada will fund three institutions that are seeking ways to make medical isotopes without using nuclear reactors, in a bid to assure a more reliable supply source, Natural Resources Minister Joe Oliver said on Thursday. Canada's only current source of the isotopes - used widely in medical imaging - is an ageing, problem-plagued reactor at Atomic Energy of Canada Ltd's Chalk River facility. The reactor is licensed to run until 2016. Oliver said the government would give a total of C$25 million ($24.3 million) to three facilities researching ways to make isotopes using non-nuclear methods such as cyclotrons and linear accelerators. "Our challenge now is to prove that cyclotron and linear accelerator production can be commercially viable. ... We envision a future where isotope production will no longer require highly enriched uranium - a weapons-grade material," he said. Speaking separately, government officials said they hoped the new non-nuclear isotopes would become commercially available in 2016 to assure no supply interruption should the AECL reactor shut down that year, when its license is due to expire. Oliver also announced Canada wanted a private operator to run the Chalk River plant and the reactor, which regulators closed for safety reasons in 2007 and then again from May 2009 to August 2010. Oliver said it would take two years to put a private operator in place. The closures dealt a major blow to Nordion Inc, which as a major supplier of isotopes relied on Chalk River. AECL had built two more modern prototype reactors to make isotopes but eventually mothballed them after a series of problems. An arbitration panel last year rejected Nordion's claim for damages against AECL. Oliver said the government was not seeking to close down or sell the Chalk River plant. In October 2011 Canada sold AECL's Candu nuclear reactor division to a subsidiary of SNC Lavalin Group Inc.