From the dusty clearing where earthmovers roll between stacked eucalyptus logs here, Argentina is little more than a stone's skip away, directly across the Uruguay River.

But in the months since two European companies began working to transform this drowsy town into a world capital of paper production, the bitterness flowing between the two countries has created a distance between them that seems wider than the shining ribbon of water.

Uruguay expects a robust economic boost from the two cellulose plants -- the largest capital investment in the country's history -- but Argentine officials are working to block the project, arguing that the pulp factories will pollute their land with toxic runoff and the chemical stench of rotten eggs.

To retaliate against the construction of the plants, officials in the Argentine province of Entre Rios recently threatened to shut off a pipeline that pumps natural gas across the border. At the end of a long holiday weekend last month, Argentine protesters blocked access to the main bridge spanning the river, creating highway backups that stretched for miles. Argentine President Nestor Kirchner recently wrote to the World Bank asking it to refuse partial funding of the factories, while Uruguay's president, Tabare Vasquez, countered with his own letter urging bank support.

Residents on each side say they don't hold personal grudges against those across the water -- but then many quickly add that there has been a palpable erosion of trust between the otherwise friendly neighbors.

"I know that if I go across the river to Gualeguaychu, I would sense bad feelings toward me because I'm Uruguayan," said Alvaro Debali, 38, a lawyer from Fray Bentos, which has about 20,000 residents. "But we really need the jobs here. If these factories don't open, Fray Bentos will disappear."

Fray Bentos and the rest of Uruguay were plunged into deep economic recession when their bank deposits and international reserves were depleted following the collapse of Argentina's economy in 2001. Eager for investment, the government has greeted the $1.7 billion pulp mill projects -- more than 10 percent of the country's gross domestic product -- as cornerstones of an economic recovery plan that organizers hope will double the nation's foreign investment income by 2010.

The companies -- Finland's Metsa-Botnia and Spain's Ence -- say thousands of jobs will be created, particularly during the two-year construction phase, and many of the projects' supporters dismiss the complaints across the river as simple jealousy.

"All of this is just politics, nothing more," said Oscar Frederico Luhers, 72, a truck driver in Fray Bentos who has worked hauling wood for the plants during their preliminary construction phases.

The international paper industry produces most of its paper from wood pulp, which increasingly comes from plantations of fast-growing eucalyptus and pine trees. Such forests have become a booming business since the early 1990s in South America, where Argentina, Brazil, Chile and Uruguay claim about 40 percent of the world's forest plantations, according to industry figures.

Although the Uruguayan plants plan to produce paper from wood using a process designed to reduce the use of chlorine compounds, there is still the potential that dioxins and other highly toxic chlorinated compounds will be emitted. Opponents on the Argentine side fear that their tourist and agricultural industries will be affected, and that the potentially carcinogenic chemicals produced by the plants will create public health hazards for anyone living along the riverbanks. The European companies are viewed by many as exploiters.

"These companies that nobody wants in Europe just want to come to the Third World and use us as their guinea pig," said Jorge Busti, the governor of Entre Rios who threatened the natural gas cutoff. "People here recognize this, and are very strongly mobilized against it."

Argentina and Uruguay this summer set up a bi-national committee to draft a report on the impacts of the projects. But the pending report will not be binding, and it is doing nothing to dampen opponents' efforts to block the plants.

Officials with the International Finance Corp., which coordinates the World Bank's private sector investment program, recently visited the region to prepare the body's own environmental and social impact study.

Horacio Melo, a high school biology teacher who lives in Gualeguaychu, is a member of a citizens' group that met with the corporation's officials to argue against the plants. In recent months, he has stood on the bridge between the two countries with thousands of other activists, feeling the bridge shake with their collective weight as idling cars waited to cross.

His grandfather is from Uruguay, and he concedes that he has more in common with his neighbors across the river than he does with the Argentines from Buenos Aires, a three-hour drive away. He said he has heard Uruguayans desperate for jobs argue that they would rather die of contamination than hunger, but he hopes that he and others can convince them that the long-term harm to the environment is more than abstract paranoia.

"I'm worried about my son, and his children and grandchildren," said Melo, 44. "The possibility that one child dies or contracts ecological illness is too much."

Protesters in the Argentine city of Gualeguaychu have denounced plans to build pulp mills across the river in Uruguay.