President Michelle Bachelet's government has rejected a huge $8bn hydroelectric project in Chile's Patagonia region, citing its adverse impact on the environment.

The decision by the Chilean cabinet to shelve the controversial seven-year-old scheme was a victory for environmentalist groups which fought the proposal to build five dams in a pristine river basin.

"The Hidroaysen hydroelectric project is hereby rejected," said Pablo Badenier, the environment minister.

Hundreds of people on Tuesday cheered the decision in the streets of Santiago and in the region of Aysen, about 1,300km south of the Chilean capital.

Patricio Rodrigo, executive secretary of the Patagonia Defence Council, called the decision "the greatest triumph of the environmental movement in Chile".

It "marks a turning point, where an empowered public demands to be heard and to participate in the decisions that affect their environment and their lives," Rodrigo said.

The joint Spanish-Chilean venture formed for the project now has 30 days to challenge the decision in the Environmental Court of Valdivia in southern Chile.

The next step would be to appeal to the nation's Supreme Court, the AFP news agency reported.

Spanish power company Endesa, which is controlled by Italy's Enel, has a 51 percent stake in the project, and Chile's Colbun the remaining 49 percent.

Cost and benefits

The project involved construction of a 2,000km long transmission line to carry power to the centre and north of the country, where Chile's major population centres and energy-hungry mining industries are located.

It called for dams on the Pascua and Baker rivers that would have flooded 15,000 acres of virgin land in the Patagonia region.

Carving clear-cuts through forests, it would also have eliminated many whitewater rapids and waterfalls that attract ecotourism, the AP news agency reported.

The habitat of the endangered Southern Huemul deer was also seen to be under threat. Fewer than 1,000 of the diminutive animals, a national symbol, are believed to exist.

A net importer of energy, Chile has experienced dwindling supplies and a doubling in energy prices in recent years due to a lack of capital investment and growing competition in the sector.

The project aimed at generating 2,750 megawatts of electricity, boosting Chile's installed capacity of 17,500 megawatts.

But Maximo Pacheco, the energy minister, said the Hidroaysen project "suffers from important faults in its execution in not giving due consideration to aspects related to the people who live there".