Bolivia's president, Gonzalo Sanchez de Lozada, was forced yesterday to suspend plans by British and Spanish petroleum giants to export natural gas to the United States via Chile as the death toll from a wave of protests approached 40.
Armed forces cleared roadblocks and quelled demonstrations while airlines suspended flights.
The protests, by the poorest people in Latin America's poorest country, have paralysed the capital, La Paz, and the nearby city of El Alto. Twenty-six people died on Sunday when the armed forces opened fire on demonstrators, an action condemned by the Church and human rights organisations as "a massacre".
The crisis deepened when the Vice-President, Carlos Mesa, withdrew his support from Mr Sanchez de Lozada. "I cannot support the government in this action," he said.
Bolivia's main trade union called a strike two weeks ago to oppose the gas plans. Protest leaders criticised the President for his free-market economic policies.
Mr Sanchez de Lozada sets great store by his relationship with President George Bush's government, which has made huge efforts to secure fuel supplies from Latin America. But the opposition says Bolivia will receive little or nothing of the revenues.
The authorities warned that further protests could provoke a military coup. Faced with the prospect of civil war, the President stepped back for the first time yesterday.
But Congressman Evo Morales, a protest leader, said Mr Sanchez de Lozada's resignation would provide "the only political solution to this crisis".
His offer to shelve the plan was not enough. "What the Bolivian people want is that the gas remains in Bolivia for the benefit of Bolivians," Mr Morales said. The Bolivian workers' organisation COB is particularly incensed by plans to export the gas through a Chilean port. Landlocked Bolivia lost its access to the sea after a war with Chile in 1879 and resentment remains strong. Loss of a port contributed to decades of poverty for a country long dependent on the export of tin.
Some of the armed forces are also unhappy because they fear the project undermines Bolivian sovereignty and strengthens Chile.
Twelve lorries, heavily escorted by soldiers in full combat gear, transported petrol into La Paz yesterday after blockades had caused food and fuel shortages in the capital. Long queues of cars waited at petrol stations for the delivery.
Nationalist sentiments fanned by the dispute have galvanised and united impoverished indigenous communities of the Altiplano highlands, coca growers whose livelihoods have been ruined by fierce anti-coca measures in recent years, trade unionists who see the prospect of jobs vanishing as gas wealth is whisked from Bolivian hands and even small businessmen, struggling after five years of economic decline.
Bolivia has huge natural gas reserves, the biggest in the region after Argentina. The Pacific LNG project is the work of the Spanish oil and gas giant Repsol-YPF, British Gas and the Pan American Energy group, which includes BP.Before the President's announcement, Repsol said it would continue with feasibility studies.