By Caroline Stauffer
SAO PAULO, Dec 5 (Reuters) - The Brazilian government's plan to resolve widespread land disputes between farmers and Indians is meeting opposition from both sides, increasing tensions in South America's bread basket.
Farmers say the proposal would not prevent productive land from being turned over to Indians while tribes protested outside the presidential palace in Brasilia because they fear the measures will slow the creation of new Indian territories.
"This was a huge disappointment," Tito Matos, a spokesman for the Agricultural Front in Congress, said of the 10-page draft ordinance presented this week.
The proposal from the Justice Ministry gives Indian affairs agency Funai the option to consult other branches of national and local governments before proposing new Indian territories. Farmers had wanted Funai, which they say threatens private property, to seek other opinions on new territories.
Brazil's 1988 constitution gives Indians the right to inhabit "the lands they traditionally occupy." The government asked Funai to identify ancestral land through anthropological studies and gave the Justice Ministry the job of approving Indian territories.
Brazil has an estimated 897,000 indigenous people, making up about 0.4 percent of the country's overall population, and about 13 percent of Brazil has been set aside for them. Most of that land is in the remote Amazon jungle but more recently Funai has proposed creating or expanding Indian territories on land used to produce soy, beef, sugar and other commodities.
Late last year the federal government evicted some 7,000 farm families and bulldozed a small town in order to return a slice of central Brazil to Xavante Indians who had been removed by a military dictatorship in the 1960s.
CATTLE AUCTIONS AND PRIVATE MILITIAS
Some 80 farms, ranches and sugar plantations in the state of Mato Grosso do Sul are now occupied by Indians who have been trying to return to the land for decades, according to the state farm association Famasul.
Angry ranchers planned a cattle auction to raise funds to hire security guards and protect their properties from invaders, although a local judge on Wednesday sided with Guarani Indians and ordered the sale to be suspended.
The state's public prosecutor's office accuses ranchers of paying private militias to murder Indians and a lawsuit to shut down security firm Gaspem is making its way through courts.
Guarani-Kaiowa chief Ambrosio Vilhalva, the lead actor in the 2008 film "Birdwatchers" about the tribe's quest to take back ancestral land, was found stabbed to death on Sunday. Vilhalva was an outspoken critic of sugar plantations in traditional Guarani territory.
Police say Vilhalva's father-in-law is suspected of killing him and Famasul said in a statement lamenting his death that alcohol, rather than land conflicts, was to blame. Rights groups disagreed.
"The impact of the land conflict on the Guarani in Mato Grosso do Sul cannot be discounted," said Alice Bayer, a spokeswoman for London-based Survival International.
"The loss of land and intimidation by ranchers occupying the land is exerting immense pressure on Guarani communities such as Ambrosio's - leading to social breakdown and internal conflicts."
The government's proposal for Indian lands, which can still be altered, would go into effect as an ordinance and does not need congressional approval. It would also give the Justice Ministry the option to hold public hearings on new Indian reserves before approving them.
Although it stops far short of stripping Funai's powers as the farm lobby wanted, rights groups fear the mere option of involving other agencies such as the agricultural research body Embrapa would slow the creation of new Indian lands.
"The ordinance, which should be published in coming days, multiplies the bureaucratic rites and formalizes the involvement of opposing interests from the early stages of the process," Marcio Santilli, founder of the Socio Ambiental NGO, wrote in a statement.
A Funai spokeswoman said the agency would not comment on the proposal because it has not yet been implemented.
Reuters exclusively reported in May that President Dilma Rousseff had sided with farmers and directed her government to slow the creation of new Indian territory.
But her government has struggled with concrete solutions. In June it sent in federal troops to a former congressman's cattle ranch in Mato Grosso do Sul to ward off unrest after a Terena Indian was shot and killed.
Both sides are now fiercely criticizing Rousseff, who is widely expected to run for re-election next year.
The Association of Indigenous Peoples of Brazil, known as APIB, frequently leads protests in Brasilia and even stormed Congress with bows and arrows in April when lawmakers were considering a constitutional amendment to resolve the land disputes.
"We know that with these measures you are looking to stop the recognition of indigenous lands," APIB leaders wrote in a letter addressed to Rousseff on Wednesday. "Your government could go down in history as truly anti-Indian." (Editing by Todd Benson and Bill Trott)