By Roberta Rampton and Jasmin Melvin

WASHINGTON, Feb 27 (Reuters) - Investors burned by the recent boom and bust in the U.S. ethanol industry will be wary of pouring money into plants for the next generation of biofuels without more stable returns, a J.P. Morgan analyst said on Friday.

U.S. law requires that 10.5 billion gallons (40.8 billion litres) of ethanol be blended into the gasoline supply this year to reduce dependence on foreign oil imports and lower emissions of climate-changing greenhouse gases.

But ethanol producers have struggled to find profits amid volatile corn prices and plunging gasoline demand and prices.

"We have a real dilemma in the industry," Ann Duignan told the U.S. Agriculture Department's annual outlook forum.

"As long as nobody's making money, the industry is not viable long term regardless of a mandate."

Four or five years ago, when corn prices were below $2 per bushel and oil prices were high, there was a "gold rush" feeling in the business, Duignan said, recalling a farmer she had met who had invested $200,000 in an ethanol plant.

"His stocks had split nine times and his investment at that point was worth $2.3 million. Never in his life did he think he was going to be a millionaire," she said.

But backers built too much capacity and production costs soared. Many plants are idled and some made bankrupt.