BEIJING, Aug 11 (Reuters) - A Chinese environmental activist, once hailed a hero for protecting China's third-largest lake, has been sentenced to three years in prison for fraud and extortion, but his wife said she was convinced the charges were trumped up.

Separately, a Chinese court reduced the jail sentence on a dissident by 17 months and he could be paroled before the 2008 Beijing Olympics, a rights group said.

A Beijing worker was released after serving 18 years for his role in the 1989 Tiananmen Square pro-democracy protests, another group said.

China's human rights record has come under fire from international press and rights watchdogs this month in the run-up to the one-year countdown for the Olympics.

Environment activist Wu Lihong, 39, a candidate in a 2005 national campaign to name 10 people who "moved China" with their service to society, pleaded not guilty to fraud and extortion and will appeal against the verdict meted out by the Yixing People's Court on Friday.

"The court did not summon any witnesses and ignored the defence's argument," his wife Xu Jiehua told Reuters on Saturday.

Wu was accused of extorting 15,000 yuan ($1,900) from a businesswoman, but he argued the money was a commission for selling anti-pollution facilities to factories, his wife said.

Wu was arrested in April after reporting worsening pollution at Taihu lake, which has an area of 2,420 square km (934 square miles) and a shoreline of 400 km (250 miles). It straddles the border of Jiangsu and Zhejiang provinces and is home to more than 60 kinds of fish.

In late May and early June, the lake was covered in a thick foul-smelling canopy of green algae that left tap water undrinkable for more than 2.3 million residents of Wuxi city in Jiangsu province and prompted a run on bottled water for days.

Tap water in Wuxi has been back to normal after the government took out 6,000 tonnes of algae, closed some chemical factories and diverted water from the Yangtze river, but experts said it did not solve key problems.

The court put off Wu's trial in June to investigate accusations interrogators tortured him to extract a confession.

"Wu Lihong told the court he was physically tormented for five days and five nights... He showed scars from cigarette burns on his hands," his wife said.

But the court ruled there was no evidence of torture.

Wu's wife has sued the cabinet's State Environmental Protection Administration for naming Yixing a model city, but the court refused to take up the case.

PAROLE

The San Francisco-based watchdog Dui Hua Foundation said in an e-mailed statement Hu Shigen, sentenced in 1995 to 20 years in prison for subversion, was given a 17-month sentence reduction this year and may be released before the 2008 Olympics.

Hu was convicted of setting up an opposition party in defiance of a ban, establishing an independent labour union and commemorating the Tiananmen massacre. His sentence was reduced by seven months in 2005.

The Hong Kong-based Information Centre for Human Rights and Democracy said in a faxed statement Xi Haoliang, a Beijing worker convicted of arson, was released from prison on Aug. 7 after his sentence was commuted.

Xi was originally meted a death sentence suspended for two years for trying to stop troops tanks from entering the capital at the height of the 1989 Tiananmen protests.