The report found that the Keystone XL pipeline by itself would not likely boost output of Alberta's oil sands because demand for the oil means it will get to the market one way or another.
"Even without it ... the oil is going to develop and is going to get to different refineries that are demanding it," a State Department official said.
A broad environmental movement has coalesced against TransCanada Corp's pipeline that would bring more than 500,000 barrels per day of oil sands crude from Alberta to refineries in Texas.
More than 320 Keystone protesters have been arrested this week in demonstrations in front of the White House in an action expected to continue into early September.
The opponents want President Barack Obama to block the line, arguing that producing oil sands emits more carbon dioxide than developing other kinds of crudes.
Critics also say the pipeline risks polluting a massive aquifer in the center of the United States, which would hurt surrounding communities. TransCanada's existing Keystone pipeline suffered two small leaks this year.
Backers of the pipeline say it will create thousands of jobs and boost oil imports from a close ally.
Besides being a major project for TransCanada, Canadian Prime Minister Stephen Harper sees it as pivotal in a national energy strategy to maximize production of the tar sands, the world's third largest crude deposit.
The Canadian and Alberta governments have lobbied hard in Washington to sell the benefits of the project, which they tout as way to reduce dependence on OPEC and to create jobs.
The oil industry believes the increased access to the huge Gulf Coast refining market would raise prices for oil sands-derived crude, which are depressed by a glut of crude in the U.S. Midcontinent region.
The State Department will hold a series of meetings beginning late next month in the five states the pipeline would pass through before making a final decision on the line.
The State Department also will now begin to assess whether the pipeline is in the "national interest" of the United States.
With the construction and maintenance jobs the pipeline would bring and the potential of the line to reduce oil imports from countries that are not always friendly to Washington, that review was not expected to be a major hurdle.
The environmental review said the pipeline itself "is not likely to impact the amount of crude oil produced from the oil sands," because other transportation systems would likely bring the oil to markets if the Keystone XL is not built. China is also interested in the oil, and one day a pipeline could be built to Canada's western coast for exports to Asia, if the Keystone line were not built.
A pipeline to the Canadian West could get built regardless of whether Keystone goes ahead. Enbridge Inc, has a hearing set for January on that project, the Northern Gateway.
The State Department said it worked closely on the final review of the pipeline with the Environmental Protection Agency, which had asked it to conduct more analysis.
"We're in a very good place regarding what EPA had commented on," another State Department official said.
"We feel that we have been very responsive ... the (EPA) seemed pleased about what we had done and the changes we had talked about," the official said.
Citing the leaks this year on TransCanada's existing Keystone pipeline, the EPA wanted more information about risks to water supplies, including the Ogalalla Aquifer, a vast irrigation source across Nebraska and other states.
The State Department did say TransCanada should commission an independent study of risks to water supplies, focusing on valves and external leak detection systems.
The EPA also wanted more analysis of the life-cycle greenhouse gas emissions from the Canadian oil sands.
The review found that the oil sands do not produce much more carbon dioxide than other heavy crudes such as Venezuelan oil, which is widely used in U.S. refineries.
It also said improved extraction techniques may over time cut the greenhouse gas intensity of oil sands crude compared to other oils.