By Aung Hla Tun

YANGON (Reuters) - The Monywa copper mine in Myanmar's rugged northwest Sagaing region should symbolize all the opportunities of a resource-rich country emerging from nearly half a century of military misrule.

Instead, as thousands of villagers protest against the mine in a rare standoff with authorities, Monywa is a vivid reminder of the festering problems that have long overshadowed Myanmar's promise - from questions over rights abuses to the opaque dealings of the financially powerful military.

On Thursday, security forces confronted demonstrators armed with sticks and knives at the mine, a day after about 5,000 villagers protested over what they say is the unlawful seizure of thousands of acres of land to make way for a $1 billion expansion of the Chinese-run project.

Its backers, the military-owned Union of Myanmar Economic Holdings Ltd (UMEHL), operated with impunity for decades. Now, emboldened by reforms, villagers are pushing back and testing the limits of newfound freedoms, including a relaxation of laws on public protests.

The dispute has halted work at the mine run by a unit of China North Industries Corp, a leading Chinese weapons manufacturer, which signed a cooperation pact with the government of Myanmar in June 2010 to develop the project after Canada's Ivanhoe Mines Ltd pulled out in 2007.

Win Cho, a Yangon-based activist, said the authorities detained one organizer of the protests and were searching for seven others in Sayhte village, about 750 km (465 miles) north of the commercial capital, Yangon.

"The police on Thursday night tried to raid Sayhte village in their hunt for the remaining seven activists but they gave up after villagers pushed back," he said.

Police, some armed with rifles, faced down hundreds of angry protesters on an area of disputed land, according to video shot on Thursday by the Democratic Voice of Burma, a Norway-based media group run by exiles. The footage showed police advancing towards the protesters, beating their truncheons against their shields.

There was no violence. But two officers carried what appeared to be a crate of ammunition. The protesters carried signs, one of which read: "This land belongs to the village. No trespassing." Others burned paper coffins bearing the mining company's name, while the crowd cheered.

The Myanmar Times newspaper said the protest had delayed the start of a planned expansion aimed at raising capacity from 30,000 metric tons a year to about 100,000, although analysts said this would hardly affect Chinese buyers.

"Most of that will be going to China," said London-based Deutsche Bank analyst Daniel Brebner. "But 30,000-100,000 metric tons is not a lot of metal, so it's not going to impact balances within the copper market."

"VERY TENSE"

The 2010 deal with China North Industries, or Norinco, was heralded at the time as a sign of Myanmar's embrace of its powerful northern neighbor and of China's insatiable hunger for natural resource to fuel an industrial boom.

But since Chinese Premier Wen Jiabao signed the pact during a 2010 visit Myanmar has seen dramatic changes - from the freeing of hundreds of dissidents to peace talks with ethnic rebels, a loosening of media censorship and signs of pulling back from the powerful economic and political orbit of Beijing.

Western business executives have swarmed into Yangon in recent months to hunt for opportunities after Washington and the European Union eased sanctions this year on the country of 60 million people, one of the last frontier markets in Asia.

"Is Myanmar an important country for minerals supply? Not at this moment. But certainly there's a lot of potential as the country is becoming more friendly to investment," said Brebner at Deutsche Bank.

But the protests at Monywa underscore the potential pitfalls of those investments, even after the military handed power to a quasi-civilian government last year.

Villagers claim more than 7,800 acres of farmland - encompassing more than two dozen small mountains - were unlawfully confiscated for the project, an echo of complaints by farmers around the country in recent weeks.

Local sources contacted by Reuters said four of 26 villages at the project site were completely displaced, along with monasteries and schools.

"The situation is very tense. Authorities are hunting for the activists while the company has not taken enough measures to remedy the losses," added Win Cho, the activist in Yangon.

Officials at the local operator of the mine, Myanmar Wanbao Mining Copper Company Limited, were not immediately available.

The mine has had a chequered history.

Ivanhoe Mines severed financial ties to the mine in 2007 amid criticism of companies dealing with the former military junta. It began trying to sell its 50 percent stake in 2004, and transferred the holding to an independent trust as a condition of a strategic partnership with Rio Tinto Plc.

A U.S. diplomatic cable, dated June 27, 2006, and released by Wikileaks, showed the difficulties Ivanhoe faced at the mine.

"Despite the high world price for copper, the over 99 percent purity of the product coming from the mine, and the desire of Ivanhoe to boost production from 39,000 to 200,000 tons annually, (Myanmar government) inefficiencies resulted in reduced production in 2005-06 and a short closure of the mine."

The cable added that Ivanhoe's Myanmar partners never received approval from senior officials to pursue an expansion. Other problems included "inefficient import processes, power shortages and banking difficulties", the cable said.

(Writing by Jason Szep; Additional reporting by Wan Xu in Beijing and Melanie Burton in Singapore; Editing by Alan Raybould and Alex Richardson)