* Controversial project suspended by Chile court * Chile-Argentine project's permit at risk, experts say * Pascua-Lama hurting water supply, glaciers - critics * Chile's legal framework tricky to navigate By Alexandra Ulmer SANTIAGO, April 15 (Reuters) - Barrick Gold Corp faces some tough legal obstacles to complete its up to $8.5 billion Pascua-Lama gold mine after a recent court decision, and even the possibility that its Chilean environmental permit might be canceled. In the latest of several recent blows to the country's mining and power industries, a Chilean court last week suspended construction of the mine, which straddles the border of Chile and Argentina, while it weighs claims by indigenous communities that the mine destroys pristine glaciers and harms their water supply. The ruling is one of several challenges facing Pascua-Lama, which was originally touted as one of the world's largest and lowest-cost gold mines. Experts say there is a risk that the unpopular project faces months, or even years, of legal limbo, damaging Chile's investor-friendly reputation. Moreover, politicians are unlikely to intervene during an election year on behalf of the project, a hot potato in Chile. "Pascua-Lama's legal path looks difficult," said Luis Cordero, law professor at the Universidad de Chile. "If the company isn't able to adequately negotiate a plan to meet (demands), its permit could be revoked." A government source told Reuters that President Sebastian Pinera's administration will not "persecute" Barrick. But the company could see its permit revoked if it fails to deal with dust, drainage and water issues at Pascua-Lama. "The ball is in their camp," the source said. A spokesman for Barrick said the company remains absolutely committed to meeting environmental and regulatory requirements at Pascua-Lama and it is working diligently to address the concerns of Chilean authorities. MANAGEMENT ISSUES Whether Barrick can turn its operation around and meet environmental requirements hinges on whether fresh management will be up to the task, mining sources say. Poor management has been a major problem for the mine; one Santiago-based source described it as "chaos". Barrick shook up the management team at Pascua-Lama last year as the project's costs mounted. The company told Reuters it continues "to take steps to further strengthen and improve that structure, with additional changes to come." Several big mining and power projects have faced setbacks in recent months in Chile, the world's No. 1 copper producer, where around 60 percent of export revenue comes from the metal. Last year, the Supreme Court suspended a key permit for Canadian miner Goldcorp Inc's El Morro copper-gold project, and rejected the planned $5 billion Central Castilla thermo-electric power plant. More than $22 billion and more than 8,000 megawatts in energy investment are suspended due in part to legal disputes and regulatory delays, Libertad y Desarrollo, a conservative think-tank in Santiago, said last year. However, Chile's top court cleared the way for the unpopular HidroAysen hydro-power project last year. At Pascua-Lama, which is expected to produce 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of production, local communities say water polluted by construction processes has run off into the Estrecho River, which indigenous and other communities in the valley use for agriculture and personal use. The complaint, lodged with the appeals court in the northern town of Copiapo, said high concentrations of arsenic, aluminum, copper and sulfate have been found in underground water supplies. Barrick denied it had polluted the river. "Barrick has not polluted the waters of the Estrecho River," said company spokesman Andy Lloyd. "Extensive water monitoring demonstrates that Pascua-Lama has had no negative impact on water quality in the surrounding area." WHAT'S NEXT? It remains unclear what kind of legal action Barrick could take if the permit was canceled or placed under review. The appeals court of Copiapo first needs additional reports before it can examine the case, said Lorenzo Soto, the environmental lawyer representing roughly 500 members of the Diaguita community who filed the complaint against Pascua-Lama. Both parties will then make their pleas. A decision is expected in a few months, he added. Whoever loses will likely appeal to the country's Supreme Court. In Chile, appeals courts are the first to deal with injunctions. If the decision is contested, the top court then takes up the case. "This is going to take up the whole year," Soto said of the timetable, including a potential top court decision. That might delay Barrick's 2014 target date for initial production. Barrick said last week it was too early to assess the impact of the suspension on the capital budget or on the timetable for production. In addition to the suit in Copiapo, Chile's newly created environmental regulator last month charged the project with failing to uphold environmental standards prescribed in its permit. Barrick told the regulator in January that a canal meant to divert run-off water away from the mine had failed. The project has also come under scrutiny on the grounds that workers' health could be at risk from excessive dust. Barrick is due to present a program detailing how it will correct the problems this month, but there is no fixed limit on how long the regulator may take to review its response. Other groups have been waiting to launch their own suits against the project, which they say will destroy nearby glaciers no matter how strict the environmental norms. "We're going to present legal actions," said Lucio Cuenca, head of the OLCA environmental group, whose lawyer successfully represented a tiny village in its battle to block the Castilla thermo-electric power plant project. Environmental groups have protested against Pascua-Lama in Argentina as well, but the Argentine government backs the project and lawsuits have floundered in the courts. On Friday, Argentina's planning minister met with Barrick executives in a sign of support for Pascua-Lama. Barrick has said construction on the Argentine side, where most of the infrastructure is, will not be affected by the court order. But since roughly 80 percent of the metal reserves are in Chile, and any permanent prohibition would kill the project.