STOCKHOLM, Sept 28 (Reuters) - Preem said on Monday it had scrapped plans for the expansion of Sweden's biggest oil refinery that would potentially have created the country's biggest polluter, blaming the economy.

The government had not yet decided whether to allow the planned 15 billion crown ($1.65 billion) expansion.

A court ruled in June it could go ahead, running counter to the Social Democrats-Greens coalition's promise to cut emissions.

"In light of the economic future prospects, Preem's Board of Directors has decided that the environmental permit application for Preemraff Lysekil will be withdrawn, and that the ROCC (Residue Oil Conversion Complex) project will be discontinued," Preem said.

It said the impact of the COVID-19 pandemic had contributed to the project no longer being commercially viable.

"Dismantling the ROCC project is a commercial decision," Magnus Heimburg, CEO at Preem since August, said in a statement.

Climate activists and others had opposed the expansion.

Greenpeace this month in protest blocked a tanker from delivering crude oil to the refinery. It said the expansion would result in increasing carbon dioxide emissions by up to 1 million tonnes per year, making it Sweden's largest source of CO2 emissions.

Teen activist Greta Thunberg, who has said Sweden would fail to live up to its commitments to the Paris Agreement if it allowed the expansion, said on Twitter on Monday the news was "a huge victory for the climate and environmental movement".

Preem, owned by Ethiopian-born Saudi billionaire Mohammed Hussein al-Amoudi, is the largest refining company in Sweden.

The group said it now instead planned to start production of renewable fuels at the Lysekil refinery.

($1 = 9.0685 Swedish crowns) (Reporting by Anna Ringstrom; editing by Jason Neely)