UPDATE 1-Thousands protest as Peru cuts mining royalties

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By Diego Ore

LIMA, Oct 30 (Reuters) - Thousands of protesters in Peru's Tacna province blocked the Pan-American highway on Thursday after Congress approved a bill that would cut mining royalties for the province and give them to neighboring Moquegua.

It was the third day of protests in the two provinces, which have been locked in a dispute over how to share millions of dollars in mining taxes paid by Southern Copper Corp (PCU.N), one of the world's largest mining companies.

The legislation, which overhauls how the royalties are distributed to all provinces in a country with hundreds of mines, was approved by a large majority in Congress and must still be signed into law by President Alan Garcia.

"They have tricked us. We are ready to fight," said Juvenal Ordonez, a member of Congress who represents Tacna.

Protesters set fire to the office of an ally of Garcia, ransacked offices of his APRA party, and stoned the national tax agency. Three police officers were injured.

Demonstrators also created havoc in front of the Chilean consulate in the city of Tacna, and seven protesters were arrested for crossing into Chile to draw attention to their demand to revoke the law.

Garcia has supported the bill, which would assess taxes based on how much mineral wealth a mine produces. The current system levies taxes based on how much dirt a mine moves.

The bill has been most controversial in the south of Peru. This year, Moquegua expects to get 20 percent of taxes paid by Southern Copper that are distributed to provinces, while 80 percent will go to Tacna.

Southern Copper operates the Cuajone mine and Ilo smelter in Moquegua and the Toquepala mine in Tacna.

Politicians in both provinces say they need the revenue to pay for basic services like water, electricity and education.

Moquegua residents celebrated after the bill was approved, while political leaders in Tacna said they were digging in for a long fight.

"The change in the law is an offense, and requires that we take radical action," said Mario Copa, mayor of the city of Candarave in Tacna.

Despite seven years of fast economic growth, some 40 percent of Peruvians live in poverty and critics say Garcia has not done enough to make sure that a boom in mining exports trickles down to the poor.

Peru's prime minister, Yehude Simon, a prominent leftist who was picked this month to lead Garcia's centrist cabinet and to prevent more waves of protests that have hobbled the Andean country this year, promised to crack down on demonstrators.

"People must be held responsible and punished to the full extent of the law," Simon said. (Additional reporting by Monica Vargas in Santiago and Terry Wade in Lima; Editing by Anthony Boadle)