LONDON (Reuters) - Thirty years after Britain and Argentina went to war over the Falklands, relations are at their chilliest in years as Buenos Aires launches a multi-pronged diplomatic offensive to assert its claim to sovereignty over the South Atlantic islands.
While a new military conflict is seen as highly unlikely, the dispute could jeopardize Britain's drive for closer economic and trade ties with emerging Latin America powers such as Brazil that it hopes will kickstart the stagnating British economy.
The discovery of oil off the Falklands has raised the stakes, leading Argentina to threaten to sue companies involved in oil exploration and to protest to the United Nations over British "militarization" of the South Atlantic.
On Sunday, the eve of the 30th anniversary of the start of the Falklands War, the Sunday Telegraph said Argentina had threatened legal action against British and U.S. banks that gave advice to or even wrote research reports about companies involved in the Falklands oil sector.
Buenos Aires has won support from regional bodies, and the Latin American trading bloc Mercosur has banned port visits by Falklands-flagged ships.
Argentine President Cristina Fernandez and British Prime Minister David Cameron have traded accusations of "colonialism".
Argentina wants to renegotiate a 1999 accord that allows a weekly flight to the Falklands by Chilean airline Lan, proposing that state-run Aerolineas Argentinas should fly to the remote islands, some 300 miles off Argentina, instead.
The islanders are skeptical, saying the change would increase Argentina's control over access to the Falklands.
London has controlled the islands since 1833. Argentina has claimed the territory - which it calls the Malvinas - since that date, saying it inherited it from Spain on independence and that Britain expelled an Argentine population from the islands.
Argentina wants Britain to negotiate on sovereignty, but London refuses to do so unless the staunchly pro-British islanders ask for talks - which they show no sign of doing. Britain accuses Buenos Aires of trying to impose an economic blockade on the 3,000 islanders.
"We do take very seriously what has now become a sustained and intense and sometimes quite aggressive diplomatic campaign by Argentina which has intensified over the last four or five months," a British diplomatic source said.
The Argentine government assumes "that if they push hard enough and make enough noise, they will somehow bring us back to the negotiating table, (and) we will sit down and start talking about sovereignty, which isn't going to happen," the source said.
Argentina is clearly trying to regionalize the issue, "to make this into a disagreement between Latin America and Britain as opposed to just between Argentina and Britain," the source added.
Argentina's ruling military junta invaded the Falklands on April 2, 1982. Britain sent a naval task force and recaptured the islands after a 10-week war, with the loss of 255 British and 650 Argentine lives.
Diplomatic relations were restored by Argentine President Carlos Menem in 1990 and ties improved - only to cool once more when Nestor Kirchner, Fernandez's late husband and predecessor as president, took office in 2003.
They have since deteriorated further, though Britain remains an important investor and trading partner of Argentina.
Klaus Dodds, professor of geopolitics at London University's Royal Holloway college, said bilateral ties were probably in their worst state since 1982. "The UK government is having to spend more and more time and resources in rebutting Argentine accusations," he told Reuters.
The discovery of offshore oil has fuelled the row.
Fernandez, a centre-leftist who hails from the chilly Patagonian region closest to the Falklands, has condemned "the plundering of our natural resources, our oil."
Rockhopper Exploration Plc estimates there are 350 million barrels of recoverable oil at its Sea Lion discovery off the Falklands and plans to start pumping oil by 2016. If four other wells come in as hoped, Edison Investment Research says the tax and royalty windfall could reach $167 billion.
Argentina's threat of legal action against firms exploring for oil off the Falklands could make them think twice before getting involved - or at least push up the cost of extracting the oil.
In a sign of regional support for Argentina, the UNASUR group of South American nations rejected British oil exploration around the Falklands in March, and Peru cancelled a visit by a Royal Navy frigate.
Latin American backing for Argentina could also deal a blow to British hopes of expanding trade with the continent.
The Conservative-Liberal Democrat coalition in power in London since 2010 says it wants a new chapter in relations with Latin America as part of its drive to increase trade and investment links with fast-growing emerging markets.
Andrew Rosindell, a Conservative legislator and secretary of an all-party parliamentary group on the Falklands, said part of Argentina's strategy was to force Britain to choose between loyalty to the Falklands and ties with Latin America.
"It's not going to work because what they've got to understand is that when it comes to defending your own people, your own people will always come first, before trade links," he told Reuters.
British diplomats say Latin American gestures of support for Argentina are often symbolic and have had little practical impact so far.
Foreign Secretary William Hague, visiting Brazil in January, said Britain was increasing its diplomatic staff across Latin America, opening several new diplomatic missions and stepping up ministerial visits.
British exports to Brazil rose nine percent in 2011 after a 23 percent jump in 2010, and Britain had set a goal of doubling trade with Brazil, Mexico and Colombia by 2015, he said.
Jeremy Browne, Foreign Office minister for Latin America, told Reuters in January the Falklands came up in conversation with his Latin American counterparts, "but I don't think it is a barrier to stronger working relations with countries in Latin America, with the exception of Argentina."
Rosindell and Derek Twigg, an opposition Labour lawmaker who chairs the all-party group on the Falklands, both said there was strong support across the British political spectrum for the Falkland Islanders' right to self-determination and, with memories of the war still fresh, they did not believe any British government could negotiate sovereignty with Argentina.
"Any party, whether Labour or Liberal Democrats or Tories (Conservatives), are very clear: Self-determination is the absolute key. There is no budging from that point," Twigg told Reuters.
British officials are ready for Argentina's diplomatic offensive to continue for at least the next few months while the war anniversary keeps the Falklands in the media spotlight.
Argentine Industry Minister Debora Giorgi drew British protests in February by urging business leaders to replace British imports with products from countries that respect Argentina's claim to sovereignty over the Falklands.
Britain asked the European Union, which represents EU member states in trade matters, to intervene with Argentina, and has responded to the Argentine diplomatic offensive by doing more to explain its position on the Falklands to Latin American nations.
"We are trying to keep the level of the rhetoric and the excitement around this issue at a sensible level and emphasizing to the region we are not trying to escalate it," the British diplomatic source said.
Rosindell said Britain should make its case more forcefully. "I think we've been too laid back on a diplomatic level. We need to do a lot more. We need to start speaking up more loudly. We need to ensure countries around the world understand the true facts about the Falkland Islands," he said.
Matt Ince, an analyst at the Royal United Services Institute (RUSI), a British defense think-tank, said Britain's strategic interests across Latin America could come under pressure unless Britain conveyed the message that "acceptance of Argentina's Falklands foreign policy is no longer a risk-free strategy."
As the fourth largest investor in Latin America, accounting for 12 percent of foreign direct investment in Chile and 16 percent in Colombia, Britain was "not without options and economic clout," he said in an article on RUSI's website.
"The UK has an opportunity to make it clear (to other South American countries) that there is a cost to supporting Argentina's posture - such as less favorable relations with the UK," he said.
Mark Jones, political science professor at Rice University in the United States, said Argentina's strategy was partly to prevent the Falklands' oil from being so profitable that the islands could be financially independent of Britain.
He said Britain's best response would be to let the Argentine diplomatic offensive die down. "Much of this is coming for domestic reasons in Argentina, this desire to distract from broader economic problems. If Britain doesn't yield at all, it is tough for the Argentine government to keep up. They have used most of the tools they have," he told Reuters.
Fernandez was re-elected in a landslide last October but her popularity fell to a 13-month low of 42.1 percent in a poll in March. The economy, Latin America's third biggest, has boomed over the past nine years but is now cooling and Fernandez has cut back on some of her popular subsidies and social spending.
British officials say the Falkland Islands, doing well from wool, fishing licenses and now oil exploration, are self-sufficient economically, though London pays their defense costs of some 60 million pounds ($96 million) a year.
When oil starts flowing, the islands will contribute to the cost of their defense, local assembly member Gavin Short told Reuters in February.
The Argentine government has said it is committed to resolving the Falklands dispute peacefully.
Still, some British legislators worry that the decision to scrap Britain's only aircraft carrier means Britain could not assemble a task force to retake the islands as it did in 1982.
Defense experts say that is irrelevant because Britain has a strategy in place to defend the islands.
Professor Michael Clarke, director-general of RUSI, says the construction of the Mount Pleasant air base on the Falklands, with two large runways, transforms the military equation.
"As long as Britain occupies the base competently, Argentina could never mount a successful invasion," he said in an article on RUSI's web site.
Britain has an infantry company, four Typhoon fighters, a Rapier air defense battery and other equipment on the islands and could fly in reinforcements within 18 hours, he said.
While Britain had given its armed forces "world-class technologies, albeit in lower numbers," Argentina had added nothing since 1982, he wrote. "In military terms, the difference between their relative technologies is probably approaching 80-100 years," he said.
Editing by Tim Pearce