By Adriana Garcia

WASHINGTON, Feb 28 (Reuters) - The Finnish company building a controversial paper mill on the Uruguay side of a river that also borders Argentina says the huge plant will alleviate pollution in the river, not worsen it.

Argentines living in Gualeguaychu, a city across the river from the plant, have protested the mill for months, saying it will dump toxins into the river, foul the area and ruin tourism when it starts up later this year.

The plant, which represents the biggest ever foreign investment in Uruguay, has sparked a major diplomatic squabble between Uruguay and its larger neighbor.

Both sides have taken complaints to the international court in Europe, and Uruguay even sent soldiers to protect the plant from potential protests at one point.

But Marko Janhunen, spokesman for Finland's Metsa-Botnia's Uruguay project, said the plant will bring environmental as well as economic benefits to the area.

"We have also committed to treat the sewage water of (the city of) Fray Bentos at the mill's site at our water treatment plant, and we have arranged to take and burn the black liquor, which is a side product of the pulp-making process, of a small pulp mill in (the city of) Mercedes."

"Through these two measures the river will be many times cleaner than it is today," he said, claiming the plant will be among the most modern in the world.

The $1.9 billion mill will start up in the third quarter of this year. Some 85 per cent of the installations are finished, 45 per cent of the equipment is good to operate and 4,500 workers are already on site, Janhunen said.

Metsa-Botnia, Europe's second biggest pulp producer, expects to create 8,000 direct and indirect jobs in the region, he added, and to produce up to 3,000 tonnes of pulp daily up to 2009, or about 1 million tonnes per year.

Although environmental protests did not move Metsa-Botnia, Spanish paper pulp company Ence decided to relocate a plant after Argentina protested.

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