The projected site of the world's largest optical telescope has become the focus of an international dispute about diplomatic immunity.

Ricardo Giacconi, director of the European Southern Observatory project in Chile, held talks this week with the Chilean government to try to resolve a conflict over its future.

The telescope is being built at Cerro Paranal on a site donated in 1988 by the Chilean government. When the land was transferred it was assumed that the site would enjoy United Nations agency status but this view is not shared by local inhabitants who say the land is theirs.

Last November, the Chilean supreme court ordered all construction work to be halted and two weeks ago a police squad broke in to the site to check whether the order had been complied with.

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Their action was authorised by the supreme court but immediately provoked protests from Belgium, Denmark, France, Germany, Italy, the Netherlands, Sweden and Switzerland who are involved in the project.

ESO protested at an "unprecedented event in the history of relations between an international organisation and its host country".

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Jose Miguel Insulza, the Chilean foreign minister, called the situation a "paradox". So far Pounds 500 million has been spent on the project. ESO's council meets next week for a progress report.