Gualeguaychu used to be a sleepy Argentine town. That was before two European companies decided to build some of the world's largest pulp mills on its doorstep in neighboring Uruguay.

Now it's a hotbed of protest as farmers, ecologists and politicians, fearing the mills will bring acid rain and the stench of rotten eggs, have taken to the streets to block the projects. Their opposition to the mills, which Uruguay hopes will help bolster its economy, has also caused a diplomatic feud between the two countries.

"There's no stopping this town. We won't back down now," vowed Edgardo Moreyra, an Argentine activist at a noisy rally outside Gualeguaychu's city hall, where students chanted, "Clean air, clean water! No to the paper companies!"

But this is not your typical David-against-Goliath battle of average citizens against big corporations.

The protesters are backed by Argentina's government, which wants the projects halted, and their slingshot is aimed at tiny neighbor Uruguay, anation of 3.4 million people better known for its picturesque cattle ranches than for smokestacks.

With the pulp mills, Uruguay's President Tabare Vazquez is embarking on one of the biggest private industrial investments in his country's history, hoping to give a boost to the economy after a deep economic crisis.

His predecessor approved the two companies' combined investment of $1.7 billion to produce 1.5 million tons of wood pulp on the banks of the Uruguay River, a natural border between Uruguay and Argentina's Entre Rios province, which is home to Gualeguaychu's 80,000 residents.

The plants will be built about three miles apart by Finland's Metsa-Botnia, Europe's second-largest pulp producer, and Spain's Ence. Construction began in April at one site and is due to start in October at the other.

Uruguayan officials expect the plants to boost forestry exports fivefold and overall exports by 8 percent.

Ence's $600 million plant is scheduled to begin exporting cellulose in 2008 at a rate of 500,000 tons a year, while Botnia's $1.1 billion installation will go into production in late 2007, producing 1 million tons annually, making it one of the largest such plants in the world.

While many Uruguayans are also enraged that their government is promoting what is considered one of the world's dirtiest industries, some in nearby Fray Bentos village look forward to thousands of new jobs.

Uruguayan engineer Bruno Vuan sees great potential as he stands in the muddy Botnia construction site watching dozens of dump trucks move dirt. "Forestry is going to be almost as important for Uruguay as beef," he said.

Across the river on the Argentine delta, opposition is unanimous. People fear that dioxin and furan emissions will endanger the river's fish and birds and wreak havoc on citrus orchards and commercial honeybees.

They accuse Ence of bringing in dirty technology that will be banned in the European Union in 2007. Both Ence and Botnia denied those accusations, insisting that their plants will comply with the strictest E.U. environmental standards.

But Gualeguaychu residents such as Daniel Perez, a dental technician who fled Buenos Aires two years ago to raise his children in what he calls "the cleanest air possible," are skeptical.

"We feel we've been chosen as the garbage dump of the world," he said.

Agriculture and tourism represent two-thirds of Gualeguaychu's economy.

Legally, Argentina has a say in any development affecting the Uruguay River, which is shared by the two countries and jointly administered under a bilateral treaty.

Provincial and municipal authorities in Argentina have aligned with the protesters, threatening international legal action against Uruguay if necessary.

Following diplomatic friction, the two governments in late July agreed that a bilateral commission would study any possible pollution from the projects over the next six months.

But the final report will not be legally binding, and in the meantime, the two companies intend to keep building.

Ence and Botnia are drawn to Uruguay because of its supply of Eucalyptus globulus trees, prized as the raw material for fine-quality paper, and for its proximity to Asian and North American markets.

"Ence cannot grow with a similar project in Europe because the biggest restriction to growth in Europe is the availability of raw material," said Ence spokeswoman Rosario Pou.

Uruguayan Environment Minister Mariano Arana has defended the companies but vowed to confront them if a study reveals any environmental risk.

"If the study says these plants are dangerous and are not compatible with the region's biodiversity, then we will not hesitate to shut them down," he said.

Workers prepare the site of a planned pulp mill in Fray Bentos, Uruguay, across the Uruguay River from Argentina. A crowd gathers outside city hall in Gualeguaychu, Argentina, to protest the plans of two paper companies, Finland's Metsa-Botnia and Spain's Ence.