By Raymond Colitt

BRASILIA, June 27 (Reuters) - Close to 1,500 Indians and landless peasants have occupied one construction site in Brazil's largest irrigation project and halted work there, activists said on Wednesday.

It is the latest in a series of land occupations this year that are testing the patience of investors in agriculture and infrastructure.

The proposed irrigation project is to pump water from the San Francisco River through 435 miles (700km) of canals to residents and farms in the dry Northeast, where President Luiz Inacio Lula da Silva grew up. The venture will cost up to 6.5 billion reais ($3.4 billion) and construction, which began in March, will span years.

"Construction at the water intake site is halted," said Jose Barros of the rural workers' union in Oroco in northeastern Pernambuco state. But other construction sites were not affected by the protests, Barros told Reuters on Wednesday.

The Army said it began construction on the base camp and not the canals at the intake site two weeks ago

"During the occupation there was no aggression by protesters," the Army press office said.

The protesters, who began arriving on Tuesday, are demanding alternative irrigation initiatives be implemented.

"We won't leave until this project is canceled," said Josivaldo de Oliveira, one of the camp coordinators.

Protesters said the project costs too much and benefits too few. Environmentalists fear reducing the river's water level could affect navigability, fish migration and biodiversity.

Civil rights groups, landless peasants and tribal Indians from five states are camped out at the site where the river was to be tapped and are planting crops and trees, the Catholic Church's Indian group Cimi said.

Bishops Luiz Cappio and Jose Geraldo from neighboring Bahia state are to visit the camp on Thursday and participate in a religious service in solidarity with the protesters. Cappio drew international attention with a hunger strike in protest of the project in October 2005.

Already, damming and deforestation have caused considerable silt accumulation along the river's banks, according to government experts.

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