FALLON, NEV. -- For the 80 years since a massive federal irrigation project transformed this isolated desert community into an agricultural oasis, men like Ted deBraga have been reaping the benefits.

A 52-year-old rancher with a sly sense of humor, a permanent squint and a picturesque clapboard farmhouse shaded by cottonwoods and poplars, deBraga raises cattle and alfalfa on 1,700 acres of irrigated land settled by his Portuguese grandfather, who was lured here by a government flier in 1916.

But if deBraga's bucolic existence in the shadow of the Stillwater Mountains seems to embody the dream that drove settlers West, it has contributed to an environmental toll never envisioned by the U.S. Bureau of Reclamation engineers who dammed the Truckee and Carson rivers and diverted much of their flows into the arid, sage-covered lands of the Lahontan Valley.

The irrigation project has played havoc with the wetlands in and around the Stillwater National Wildlife Refuge, an oasis of cattails and bullrushes that serves as a vital way station for some of the densest populations of migratory waterfowl in North America.

Starved of water and contaminated by natural poisons leached from irrigated farm fields, the Stillwater marsh is an ecological basket case barely a tenth of its natural, 100,000-acre size. Seven million fish died here in 1987; waterfowl populations have plummeted to 40 percent of normal levels.

For decades conservationists and wildlife managers have despaired of a solution to the Stillwater problem, but now it appears they may have found one -- in farmers like Ted deBraga.

In the first stage of a plan that conservationists hope will serve as a model for environmental restoration throughout the arid West, deBraga and four other Lahontan Valley farmers have agreed to take some of their lands out of production and sell their unused water to the Stillwater refuge at market prices.

The first installment began flowing June 2.

"There has to be a sense of balance," deBraga said recently as he sat on a hay rake outside his machine shed. "We can't take enough water off of this project to put the wetlands back the way they were, but they need more than they're getting now."

A joint effort of the U.S. Fish and Wildlife Service and the Nature Conservancy -- a private group that has provided nearly $1 million in seed money for the project -- the unprecedented water rights transfer amounts to turning back the clock on a century of federal water development.

It also marks a victory for conservationists, who contend that the most effective means of protecting the environment is not through lawsuits and confrontation but good old-fashioned capitalism.

"Litigation is the norm throughout the West, it has been for a hundred years -- and we still have a mess on our hands," said David Yardas of the Environmental Defense Fund, which played a role in the Stillwater negotiations and advocates market-based solutions to environmental problems. "What we're trying to do is bring . . . economic considerations into the water-use calculus."

The water purchases are but a first step down a long and tortuous path. Although conservationists estimate that the restoration ultimately will require 50,000 acre-feet of water, the local irrigation district, which is chaired by deBraga and represents farmers in the valley, has capped the sales at less than half that amount. (An acre-foot is the amount necessary to cover one acre with water a foot deep.) So far the effort has secured 5,500 acre-feet.

Moreover, while Sen. Harry Reid (D) has introduced a bill that would add $16 million to the $2.7 million now appropriated for water rights purchases for Stillwater, that is still well short of the $50 million that the Fish and Wildlife office estimates will be needed to reach its goal of restoring 25,000 acres of productive marsh -- about one-fourth of the original.

Nevertheless, the initial purchases represent a promising development in a protracted water war so complex and divisive that it has earned the Lahontan Valley a reputation as the Middle East of the West. Local farmers, the cities of Sparks and Reno and Indian tribes are all competing with the refuge for a share of the overtaxed Truckee and Carson rivers.

In an ironic twist, the situation at Stillwater has been exacerbated by federal efforts to protect an endangered fish in Pyramid Lake northwest of the valley. More water for the sucker-like qui-ui means less water for the refuge.

"Man screwed it up. Man can fix it," said Ron Anglin, the 42-year-old refuge manager and a blunt advocate for the water-rights purchases. "All it takes is money. . . . That's the American way."

Built during the early part of this century, the elaborate system of dams and canals that makes up the Newlands Irrigation Project marked the federal government's first large-scale attempt to make the desert bloom.

Today the project has largely fulfilled that promise, sustaining nearly 70,000 acres of alfalfa, melons, garlic and pasture in a climate that receives less than six inches of annual rainfall.

But in trapping the Truckee and Carson rivers, which tumble down from the Sierra Nevada and flow east into the Great Basin desert, Newlands sowed the seeds of environmental tragedy. The water that percolates through deBraga's fields once would have flowed directly into the Stillwater marsh, nourishing a rich and productive wetland that remains one of the key nesting and feeding sites for birds migrating along the Pacific "flyway." A portion of the marsh became a national wildlife refuge in 1948.

Even in its diminished condition, the Stillwater marsh each year harbors up to a quarter-million shorebirds, 400,000 ducks and the largest breeding colony of white-faced ibis in North America.

But time is growing short. Chronic water shortages have shrunk the marsh to an all-time low of 4,000 acres. Moreover, virtually all the water that reaches the marsh is loaded with natural toxins that irrigation has freed from converted desert lands -- heavy metals such as arsenic and mineral salts such as selenium and boron, to name a few. Water flowing into the marsh from some agricultural drainage ditches is more than twice as salty as seawater; a 1989 Fish and Wildlife study found it was lethal to small aquatic organisms.

In a crusade unusual for a uniformed Fish and Wildlife manager, Anglin has fought for four years to acquire water rights for the refuge, making repeated forays to Washington and even presenting his case to President Bush's public relations adviser, Sig Rogich, a Nevadan who hunted in the refuge as a youth. By his own admission, Anglin spends much of his time "networking" with conservationists here and in Washington.

But it was not until the arrival of David Livermore, director of the Nature Conservancy's Great Basin field office, that the water purchases began to take shape. Rangy and low-key, from a line of prominent California conservationists, the 35-year-old Livermore is in many ways typical of the Arlington, Va.-based Nature Conservancy. In contrast to the activism of groups such as the Sierra Club, conservancy members prefer to save the environment the old-fashioned way -- they buy it.

While the group normally directs efforts toward acquiring ecologically sensitive lands, Livermore and others saw no reason why the same principle could not be applied to water. "In the arid West, it's not enough to buy land -- you have to buy water too," said Livermore, whose initial approach was to visit a local farmer and "talk about bobcats."

Among the most significant achievements was a ruling by the state water engineer that permitted the transfer of irrigation water to the wetlands, confounding a century of federal irrigation practice favoring agriculture over all other uses.

Despite the conservancy's offer of $300 per acre-foot , many farmers remain wary of attempts to divert project water from its current use. DeBraga, who is selling 1,200 acre-feet of water and plans to retire about 500 acres as a result, shares many of his neighbors' anxieties. But he thinks the bottom line ultimately will prevail.

"It's surprising how many have come to me and told me they would sell their {water rights} but they won't tell their neighbors," he said. "They start out by saying, 'Well, of course I won't sell my water rights -- but it depends how much they'll pay me.' "