NORTH OF VATNAJOKULL GLACIER, Iceland — This is Europe's second-largest wilderness, a high plateau of lakes and virgin rivers, jagged canyons and snowy former volcanoes linked by swards of treeless tundra inhabited by thousands of reindeer and geese.

It is also the alpine spillway for billions of gallons of glacial melt that Iceland's national power company plans to use in the $3 billion Karahnjukar Hydropower Project, an undertaking so big it equals nearly a third of the country's gross domestic product.

The wildlife-versus-voltage battle has been fought on the banks of many of the world's rivers. But it is being played out here on epic scale across an extraordinary landscape.

The power plant to be built will have one customer: an aluminum smelter owned by Alcoa, the world's largest aluminum company, which is considering investing $1 billion.

Alcoa entered the picture only in April, and is hoping to conclude price negotiations with Iceland's government and national power company this week so that work can begin next month, during the short summer. But schemes to dam the area for hydropower have been in the works for decades and have been fought in a see-saw battle for just as long.

Asked why Alcoa would want to enter such a fight, Jake Siewert, an Alcoa spokesman, noted that the company had found "a broad coalition" welcoming it to Iceland. It had considered other locations, including India, Brazil and Vietnam, he said, adding that it would meet opposition anywhere.

"Where's the clean project?" he said. "Do you know of one that has no political impact and that environmentalists are all for?"

Hydropower, he added, would at least be cleaner than a coal-fired smelter somewhere else.

For Iceland, which has only about 280,000 people, the project is a grand experiment in social engineering. The test is to see whether dying towns can be repopulated and virtually an entire region's economy redirected from fading fishing industries and skittish tourism.

The smelter is to rest on Iceland's wind-swept eastern fjords, with a view to creating 2,000 construction jobs and 600 to 1,000 permanent ones in a region that Icelanders are deserting in droves. When and if the project is finished, 80 percent of Iceland's electricity will be dedicated to making aluminum.

Other projects, like the Three Gorges Dam in China, cover more landscape and displace more people. But Iceland's endeavor is remarkable for the way it shifts around the basic elements of a fragile ecosystem in pursuit of economic revival.

Outraged environmentalists say Iceland is selling its wild birthright, damaging its eco-tourist image and risking its credit rating to benefit a $23 billion American conglomerate and to win a mere handful of jobs.

Prime Minister David Oddsson, who backs the plan, counters by saying that Iceland has profitably taken big risks to attract smelters twice before, that it must keep its rural areas populated and that it will still be able to establish a stunning national park, as environmentalists desire.

"We've calculated that the damage is relatively small," he said in an interview. "And even 600 jobs in this part of Iceland is very important."

The present plan was approved by 44 of Parliament's 63 members, including 12 members of the opposition. In a poll, 47 percent of Icelanders who responded supported the plan, and 30 percent opposed it.

The chilly tundra north of Vatnajokull Glacier is Europe's second-largest wilderness area, after Svarlbard Island in the Arctic.

The latest plan calls for damming up two of the area's three virgin rivers, draining them through 24 miles of tunnels, and then pouring the water through turbines to generate 700 megawatts of electricity.

Last August, environmentalists declared victory when Iceland's State Planning Agency killed the plan, saying that the dams would do too much environmental damage and that the economic advantages were vague. But the agency decision was reversed in December by the environment minister, a member of the Progressive Party, which strongly advocates repopulating eastern Iceland.

Environmentalists cheered again this April when Norsk Hydro, the Norwegian aluminum company, backed out after having problems raising money. Its chief executive also said he had doubts about finding enough workers in the east, which has only about 11,000 residents.

But the government vigorously pursued a new customer, and Alcoa's chairman, Alain Belda, told local papers recently that there was "a good chance" it would step in and build a smelter in Reydarfjorur, for the export market.

The actual price at which Iceland will sell Alcoa its hydropower is still being negotiated, and will not be made public. But Norsk Hydro was known to be negotiating for around 2 cents per kilowatt-hour, half the rates in the United States and less than a third of some in Europe.

An outspoken opponent of the project, Kolbrun Haldorsdottir of the Left-Green Party, said the government was "not even begging on its knees to the aluminum companies any more: they're amputated; we're on stumps."

The country, she said, only bothers to do environmental impact studies because of European Union pressure, and its secretiveness over the price "makes us a banana republic."

Mr. Oddsson, who has been prime minister for 11 years, bristled at this and said: "My opposition has gone bananas. This process is very transparent." Members of all parties sit on the board of the national power company, Landsvirkjun, he said.

A Russian company has also expressed interest, but both the government and environmentalists note that Alcoa says it can coexist with a national park and has a relatively good environmental record. The chief of the American branch of the World Wildlife Fund sits on its board, though she says she has recused herself from anything to do with this project.

There is another plum for Alcoa in the deal. Because Iceland is so pollution-free — 98 percent of its buildings have geothermal heat and hot water — it negotiated an exception to the Kyoto accord on greenhouse gases, so Alcoa will not have to pay penalties for the carbon dioxide emissions that its smelter will produce.

The company has agreed to do the dirtier parts of its operation overseas. It may switch to new low-carbon dioxide technology and will supply the plant by ship rather than truck.

Environmentalists remain hostile, but less to the smelter than to the dams.

The current plan calls for eight of them across tributaries of the two rivers, Jokulsa a Dal and Jokulsa i Fljotsdal. The small, high-altitude reservoirs on the Fljotsdal would drain through tunnels into a huge new reservoir on the Dal. It, in turn, would drain through a 24-mile-long tunnel over the edge of a plateau, through the turbines, and then back into the bed of the Fljotsdal where it widens into a lake.

There would be, environmentalists complain, a multitude of effects.

Helgi Hallgrimsson, 67, who has opposed the project for decades and calls it a potential "world-famous example of short-sighted politics and subservience to foreign capital," contends that 100 waterfalls between 6 feet and 130 feet high will be lost.

Honnun, the engineering consulting firm that coordinated the environmental impact study, contends that only three will be lost. But they only include waterfalls submerged by dams, while Mr. Hallgrimsson includes those dried up when the stream above disappears.

Dimmugljufur, the Dark Canyon, a cleft in the earth full of troll's caves and basalt columns that the power company's own brochures call "Iceland's most dramatic canyon," will itself be dammed at its entrance and bone dry in all but the wettest months of the wettest years.

Disgusted opponents say the waterfalls will be turned on and off like spigots when tourists are expected in the brief July-August hiking season.

The new Halslon reservoir behind the dam would cover 22 square miles, much of it vegetation where 1,500 reindeer graze. As a result, environmentalists argue that a third of the reindeer will die, though Skarphedinn Thorisson, a wildlife biologist who has studied them since 1979, was more cautious. "There will be some mortality," he said, "but I can't estimate how much."

It is hoped that the geese who nest there, who are not endangered and whose flocks have been increasing, will find new nesting areas.

The damming is also likely to make Lake Lagarfljot, an east Iceland landmark already milky white from glacial silt, become browner from mud, affecting trout and arctic char. It may also shift the common delta that both rivers share, which may affect harbor seal herds.

Environmentalists are angry that the power company has already graded roads and built tourist overlooks with billboards describing the dam, even before it had permission to build.

"If you live here, it's very difficult to say you're against it," said Karen Erla Erlingsdottir, a member of the Organization for Protection of the Eastern Iceland Highlands, who lives in Egilsstadir, on the Lagarfljot Lake. "All the politicians like it and say it's the only thing that can save the area."

Gudmundur Bjarnason, the mayor of Reydarfjorur and two other coastal towns, says 90 percent of his 3,000 constituents want the smelter. "We can't live on tourism," he said. "The season is short and the jobs pay very low. Smelter jobs pay well, and they need 60 percent high school graduates. We need to get our young people back."

The Iceland Nature Conservation Association, which is the World Wildlife Fund's local partner in fighting the project, has sued to overturn the environment minister's ruling, and another environmental organization, Landvernd, is lobbying aluminum companies, trying to get them to shy away from the project.

Each side has had economists produce studies showing that the venture can or cannot be profitable. Both depend on assumptions about the price of power that has not yet been set.

Arni Finnsson, director of the Conservation Association, said hydropower is not "renewable energy" as its defenders claim. "That dam will fill up with sediment, and future generations will have to deal with it," he said. "It's like mining: it's not sustainable."

Prime Minister Oddsson called the environmentalists "pessimists" forever predicting disaster and demanding new studies. "There are endless numbers of flowers you can count," he said, "but most people admit that this is finally close."