The first snow falling in the Icelandic highlands and the piercing wind are not slowing down the hundreds of foreign workers building Europe's highest dam in one of its biggest wildernesses.

Iceland's largest-ever industrial project by the national power company Landsvirkjun is a saga of superlatives, hailed by ministers and local politicians. Yet it has whipped up a row about the environment among the population of under 300,000.

The project will increase the North Atlantic island's energy output by 60 per cent but it will have just one customer, an Alcoa aluminium smelter which should be up and running in 2007.

The Karahnjukar dam, which will be 190 metres high, 730 metres wide and 600 metres thick, will damage the area's unique nature forever, environmentalists say.

"The project is too big for the nature up there and for the region," said Thurdur Backman, a Left-Green party representative in parliament. "We who have another view on how to use nature had hoped to set up a national park there."

But a clear majority of local people support the project, saying building the power plant and the smelter are the only ways to create growth and jobs in a remote region.

The plant will have a capacity of 690 MW and an annual output of 4,460 million GWh, a significant size on a Nordic scale.

To feed it, Landsvirkjun is harnessing two of the three main rivers flowing from Europe's biggest glacier, Vatnajokull. Three dams will create a 57 square-km reservoir - a rare project in Europe where few dams have been built in recent decades.

Opponents of the project say it would drown the highland vegetation, alter the groundwater balance and collect so much mud that it would form a dust bowl in dry conditions, choking the nearby town in windy weather.

Organisations such as the Icelandic Nature Conservation Association say the reservoir would disturb the area's reindeer, freshwater fish and harbour seal population and ruin approximately 500 nesting spots of the pink-footed goose.

To add to the messy saga, Impregilo, the Italian firm building the dam and tunnels for the plant for 40 billion Icelandic crowns ($517 million), has run into trouble with local unions which say it is not paying imported workers enough.

The construction of the dam will employ around 1,500 workers, as many people as the population of nearby Egilsstadir. Hundreds, some with families, have already come from Italy, Portugal and Romania to work here. They live in a remote highland camp, a 1-1/2-hour drive from Egilsstadir.

Cosmopolitan influences have reached the tiny town - pubs now publish adverts in English, and restaurants are packed on Sundays.

The 322,000 tonne smelter itself, an investment of $1.1 billion, will be built in Fjardabyggd, some five kilometres outside Reydarfjordur, a drowsy town of 600 people.

Real estate prices have already started rising there. "I understand the people who oppose Karahnjukar, but I don't agree with them. I think it's more important to get new jobs in the east," said Fjardabyggd mayor Gudmundur Bjarnason.

The biggest local industry is fishing, but fish factories have modernised production, making them less dependent on manual labour. Farming is a shrinking industry in the hostile climate, and the tourism season lasts a mere three months.

As employment opportunities have declined, the region has lost one per cent of its population each year to bigger cities.

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