Cajamarca, where some residents fear that mining Quillish will sully their water supply and threaten public health, is fighting Yanacocha in court to keep the site hands-off for mining.

The Quillish dispute reverberates far beyond this picturesque city as the government of President Alejandro Toledo tries to reconcile the pressing need for foreign investment with a rash of conflicts over mining projects.

In the lush northern valley of Tambogrande, for example, residents bitterly oppose Canada's Manhattan Minerals' $315 million gold project, which they say will ruin farming.

"I'm aware that Peru is a country that relies on mining ... But we can't sit by and wait for our water supply to be ruined," Cajamarca Mayor Jorge Hoyos told Reuters. "We can't swap gold for lives."

Yanacocha, 51.35-percent owned by Denver-based Newmont , says the site has proven reserves of 3.7 million ounces of gold - representing around 10 percent of the company's 36.6 million ounces of reserves.

Yanacocha Managing Director Federico Schwalb said an environmental impact study would prove that mining gold from Quillish would not endanger the water supply or the health of nearby residents, and that mining would bring jobs and development.

"It's not a water reserve," he said as he steered a truck past Quillish, only a stone's throw from Yanacocha's main site.

Schwalb said Yanacocha - of which Peru's Buenaventura owns 43.65 percent and the World Bank controls 5 percent - has spent about $20 million investigating the site.

But many people in Cajamarca, where Spanish conquistadors turned the tide in South America when they captured the Inca empire's leader Atahualpa and hanged him in the 1530s, say that Yanacocha's new project is not welcome.

QUILLISH OFF LIMITS?

Cajamarca and Yanacocha took their feud to court after the local government issued a resolution in October 2000 declaring Quillish "untouchable" for mining. After a local court twice sided with local officials, Peru's Constitutional Court is now due to hear the case, but no date has been set.

Hoyos said Yanacocha is a touchy subject for local residents, who allege that mining has brought crime and prostitution, not to mention sickness, to this humble town. In 2000, dozens of residents of a village near Cajamarca fell ill after a truck contracted by Yanacocha leaked mercury being transported from the mine to the coast.

The miner says it paid $14 million in compensation and for clean-up work, including sponsoring a doctor in the village.

"Mining doesn't do anything for Cajamarca," said 19-year-old Marco, who earns spare change by telling tourists about local history.

Lounging on an Inca stone hundreds of years old, Marco and his friends complained that mining offered few jobs for youths like themselves. "We have our papers in order and some of us have even studied. Now we want to work," fellow guide Juan said.

But the company, 60 percent of whose 5,000 workers are from Cajamarca, says it is an economic boon for the city and has helped fund necessary infrastructure projects like drinking water as well as schools for nearby communities.

Standing next to a trout nursery sponsored by Yanacocha, Alejandro Quispe says the mine has had a positive impact on the farming cooperative he heads near the mine. "The proof doesn't lie," he said, pointing to trout swimming in concrete tanks.

MINE SAYS COMMUNICATION KEY

While the road from Cajamarca to the mine is dotted with signs of Yanacocha-sponsored projects, Hoyos was dismissive.