* Cajamarca region launches protest Wednesday
* Peru working on social development fund with Newmont
* Locals worried about environmental impacts
By Terry Wade and Marco Aquino
LIMA, Nov 9 A one-day protest by communities in the northern region of Cajamarca on Wednesday against Newmont's $4.8 billion Conga gold project was peaceful and did not hurt mining operations, the government and the company said.
Local political leaders in the northern region of Cajamarca have demanded the company abandon the mining project, the most expensive in Peru's history, because they fear it will pollute the air with dust and displace four lakes that are important water sources.
But Peru's central government, which is trying to mediate the dispute, said it has made some progress calming tensions and was working with the company to set up a "social fund" to provide funding for community projects.
A Newmont spokesman said work continued normally at its sprawling Yanacocha mine nearby and that work was temporarily halted at the Conga project as a precaution. Conga is not scheduled to begin producing gold for about three more years.
"Cajamarca remained peaceful and though there were some reports of roadblocks the airport was operating normally," said Victor Caballero, who is managing mediation efforts as the head of conflict prevention in the prime minister's office.
Wilfredo Saavedra, one of the organizers of the protest, said dozens of protesters had blocked access to the Minas Conga project.
"In the city, traffic and trade is restricted and we are in a peaceful demonstration," he said.
The government says it is working to see if the company's environmental impact plan could be improved upon so as to obtain the support of local communities.
President Ollanta Humala took office in July promising to end debilitating social conflicts over natural resources in Peru, a leading global metals exporter. The previous government approved the impact plan last year, but since then local communities have voiced opposition to the project.
Caballero said local farmers were worried that reservoirs the company plans to build to replace the lakes might not adequately seep water to irrigate their fields.
He said experts would review plans for the reservoir to see what kinds of materials could be used to ensure water would seep out of the bed of the reservoir and reach agricultural fields.
"The company needs to show flexibility, it can't impose an environmental impact study that doesn't have community support," Caballero told Reuters.
A Newmont spokesman said the company's environmental plan included input from thousands of people and "was one of the most robust and transparent ever conducted for a natural resource development in Peru."
Humala has said he would make sure the mine is built. It is expected to produce between 580,000 and 680,000 ounces of gold per year and be a lucrative source of tax revenue.
Humala, who won strong support from the rural poor in the June presidential election, took office pledging to end nagging social conflicts through dialogue. Conga is a key test of his team's ability to resolve conflicts.
The government has also been trying for more than a month to broker a wage accord and end a strike at Freeport McMoRan's Cerro Verde mine, which churns out 2 percent of global copper supply. The strike has not markedly impacted prices and the company has said it is mining at about two-thirds of normal capacity.