Early last month five large half-built houses on the "Street of Dreams", an opulent development in the quiet Washington state suburb of Woodinville near Seattle, caught fire. Three buildings were gutted and two were seriously smoke-damaged to the tune of about $7m. The fire brigades took six hours to put the fires out, but no one was hurt.

These were no ordinary houses. Set in an expensive UK green belt-style "rural cluster development" area (RCD), they were locally unpopular $2m, 4,500 sq ft buildings, dubbed "McMonsters". Moreover, they were billed as "green", built to tick every box of the well-heeled ethically conscious families they were aimed at: formaldehyde-free materials, energy-efficient appliances, pervious pavements, extra insulation, recycled wood for windows and doors.

It did not need a great detective to tell that this was arson. A large spray-painted bedsheet left at the scene read: "Built green? Nope black. McMansions in RCDs r not green." It was signed "Elf" - the Earth Liberation Front.

So whodunnit? The Seattle Joint Terrorism Task Force, working with the FBI and the US Bureau of Alcohol, Tobacco and Firearms, said this week that they were indeed working on the theory that it was "eco-terrorism", carried out by a cell of environmentalists using the catch-all title of the Earth Liberation Front.

Assumed by the authorities to be a sister organisation of the Animal Liberation Front, this radical fringe of the broad US environment movement does not physically exist. It has no membership, HQ or staff, but is said to work in autonomous "cells". Some say it started life in the UK - in Brighton, at the time of Twyford Down and the British road protests in 1992. Splitting from other British groups, the concept of a non-organisation committed to property destruction never really took off here, but it crossed to the US, where its legend as a group prepared to destroy property grew with the anti-capitalist and globalisation movements.

According to the FBI, "eco-terrorism", or "ecotage", is now the number one domestic terrorism threat in the US, greater than that of rightwing extremists, anti-abortion groups and animal rights organisations, and on a par with al-Qaida. The US building industry, rightwing political groups and the mainstream media all leapt to condemn the ELF after the arson. "We've seen this grow over the years and it's very scary," said Brian Minnich of the Building Industry Association of Washington, which offered a $100,000 reward for information leading to the conviction of the arsonists.

"It tends to be done by young, intelligent people," says FBI special agent Robbie Burroughs. "There is nothing to suggest that [the Street of Dreams arson attack] is anything else than terrorism."

But the jury on the McMansions arson is very much out. Instead of striking fear into the heart of middle America, the incident has revealed growing civil liberty fears about the US government's redefinition of terrorism, and a breakdown of trust in the authorities. Although rightwing commentators and libertarian bloggers have used the attack as ammunition in their ideological war against environmentalists and the left, few others think it is so simple. The more anyone looks into the arson, the more they suspect that it has probably got more to do with fraud or political smearing and dirty tricks than with terrorism.

Letter writers to the Seattle press and websites like Treehugger.com and Grist say it is suspicious that the attack on the McMansions should take place in the middle of America's most serious downturn in the housing market in 30 years, with a recession looming and properties almost impossible to sell. People are deliberately setting fire to their own properties to escape mortgage misery, they say, and only one of the houses on the Street of Dreams is said to have been sold.

Mainstream greens point out that both the fossil fuel industries and US rightwing groups like the "Wise Use movement" have a long history of trying to discredit environmentalists. The advice given to the FBI from nearly every quarter has been: "Follow the money" - implying that the arson was possibly insurance-related. The FBI say it has found nothing to suggest this.

John Heller, the president of Street of Dreams Seattle, was unavailable for comment, but in a statement on his website said: "At one time there were issues involving an environmental group that had opposed the development but it's our understanding that the parties settled their differences."

While some blame the ELF, many more, like "Wiskidea" on Grist, have pitched in with plausible scenarios suggesting why it was as likely to be kids, or someone who lost a job in the recession: "Maybe someone just went nuts, or a racist saw a bunch of Mexicans working on the houses and torched them."

"It just doesn't make sense. Why should [environmentalists] burn down green homes and cause even more emissions?" asks John Hunt, a Sierra Club member from Seattle.

"We all know that intelligence agencies regularly plant stories to discredit people that the White House doesn't like," says another commentator. "Don't be surprised if the ranks of domestic terrorists swell to include vocal green activists as the election accelerates." It has also been pointed out that one dirty trick of the fossil fuel industries in the past 20 years has been to sow the seeds of doubt with fake groups and discrediting of enemies.

Environmental sabotage, also known as "ecotage", "eco-defence" and "monkey-wrenching", has been practised widely in the US since the birth of the modern environment movement in the early 1970s. At its height, in the late 80s and early 90s, metal was being nailed into trees to stop them being felled, factory waste pipes and chimneys were blocked and heavy plant machinery sabotaged. As green concerns have changed, attacks have moved on to university GM labs, SUV cars and housing developments.

But the case for the McMansion fires being ecotage is weak, because this form of radical protest has all but died out. While animal rights extremism has continued, in the past seven years, the FBI admits, there have been only a handful of attacks on property that could have been committed by environmentalists.

There are currently seven unsolved cases on the FBI's books in the US north-west, considered the centre of ELF activities. Two bear the same hallmarks as the McMansion attack: in April 2005, a garage close to Seattle was torched and a similar crude message scrawled on a sheet: "Where Are All The Trees? Burn, Rapist, Burn," it said. A year later, a half-built 9,600 sq ft, $3m house under construction was gutted by fire and a similar message was sprayed on a sheet and draped across the front gate to the house.

Moreover, instead of defending attacks on property as legitimate targets, the ELF has gone silent. Their website has for six or more years been only sporadically updated, no "communiques" have been issued and the usual ELF defence that attacks on property as opposed to people are legitimate have not been used.

"No one will talk on behalf of anyone remotely linked to ecotage," said one man who asked to remain anonymous this week. "It's off the agenda." The website, clearly being monitored by the authorities, does not respond to emails.

The silence is said by people involved in the 1990s US environmental and animal rights activist movements to be partly as a result of ELF groups voluntarily giving up arson as a tactic following an undefined "mistake". But above all, they say, 9/11 had the most chilling effect.

The attack on the twin towers led directly to the draconian Patriot Act, which created a new category of domestic terrorism and allowed the FBI to expand its domestic and international powers. Many actions previously considered vandalism (and attracting sentences of two to four years) could now be classed as major acts of terror, and life sentences could be passed.

The new targeting of environmentalists and what some say is a hysterical exaggeration of the seriousness of eco-terrorism is widely seen as the Bush administration's payback for the humiliation piled on the US and its corporations by environmentalists at the Seattle World Trade Organisation talks in 1999. The national guard had to be called out, the talks were abandoned and, as tear gas drifted around the city, US policies were ridiculed around the world.

The new terror laws have also allowed the FBI and federal government to target people it had given up on years before and use new surveillance methods. One person caught up in what has become known as "the Green Scare", and whose case may provide a partial answer to the riddle of the Street of Dreams, is 32-year-old violin teacher Briana Waters, now in Oregon state prison a few hundred miles south of Seattle.

According to two women who testified against her in return for dramatically reduced sentences, this mild-mannered, pacifist tree-sitter with a young child and no previous convictions hid in shrubbery by the University of Washington's GM tree laboratory back in 1999 while others set fire to it. Last month she was in court and testified that she wasn't even in Seattle that night, but she was found guilty of arson and will now receive a mandatory sentence of up to 20 years.

Remarkably, the attack on the McMansions happened on the same day that Waters' trial was beginning in Oregon. It also just happened that the federal prosecutors immediately and very publicly linked her case to the arson. Depending on who you believe, the attack either worked in the interests of the government, which secured a controversial conviction, or it was a warning shot by other ELF groups that they would not be intimidated by show trials.

Waters is part of what US civil liberty groups are calling an extraordinary witch-hunt being conducted against green activists and animal rights groups, who are being accused of terrorism for arson offences committed before 2001. Most, says Lauren Regan, a lawyer with the Civil Liberties Defence Centre in Eugene, Oregon, have been indicted on the testimony of one man, a former ELF cell leader and self-confessed heroin addict called Jake Ferguson, who has admitted being part of 18 arson attacks linked to the Animal and Earth Liberation Fronts between 1997 and 2001. In return for up to $100,000 of state money, says Regan, Ferguson was wired up by the FBI in 2003 to entrap his co-conspirators.

His testimony and activities are said to have led to a cascade of charges levelled at activists around the US. "The government built its case against Waters on the testimony of two informants, and several pieces of circumstantial evidence. The defence argued that the informants - both from relatively wealthy families - pleaded guilty to a minor felony charge and accused her in order to avoid 35-year prison sentences they were threatened with," she says. Of the four others linked to the same firebombing, one is on the run, and another recently died in prison.

According to many, the US is now in the middle of a "Green Scare" akin to the "Red Scare" of the 1950s, when senator Joseph McCarthy launched his infamous communist witch-hunt. Environmental and animal rights activists are being targeted, it is believed, not because they are dangerous, but because in the wake of 9/11 the government needs scapegoats beyond Muslims, and people - often young, white and middle-class - with defined ideologies who target corporate America are easy and attractive game.

But the venom with which the government has pursued its dissenters has shocked people well beyond the green movement. Regan and other civil libertarians accuse it of using illegal tactics, threatening people with hundreds of years in prison for their roles in petty arsons, infiltrating groups, massive surveillance, hiring provocateurs, and handing out sentences of 20 years or more for offences that in other times would bring a maximum of two to four years. The campaign against the environmentalists has been marked by government vindictiveness and prosecution misconduct, it is alleged.

"Environmental groups are being harassed, infiltrated and spied on by the FBI and the police as never before," Regan says. "Everyone who is an activist is now a target. Big Brother is here. The government has hounded the activist community, overcharged individuals with federal firearms [laws] applying to bombs and missiles, and branded them as terrorists, even though none of the events resulted in a single injury."

Two weeks ago, four people were charged with a 1999 arson at Michigan State University when a federally funded GM research lab was attacked. The FBI immediately held a press conference labelling the culprits terrorists. "Domestic terrorism is a top priority of the FBI and we will continue to aggressively investigate and pursue prosecution of all such matters," said a spokesman.

"Eco-terrorism is what happened in Bhopal, India," says Regan. "Eco-terrorism is when Saddam Hussein blew up the oil rigs. These cases are acts of property destruction, pure and simple. The [US government's] tactics are designed to scare and silence people who might speak out against the government normally."

The wave of prosecutions has already resulted in draconian sentences and is likely to lead to more. Six activists were each given a six-year prison sentence for running a website that only posted information about vandalism attacks, without connecting themselves to the acts in any way. One man, Jeff Luers, who set fire to three cars in Oregon to bring attention to gas-guzzlers' contribution to global warming, was given an extraordinary 22 years, eight months.

"A lot of people are scared and intimidated right now," said Luers in an interview in 2006. "They're either going to fall apart, or they're going to come together and show that, no matter how many arrests are made or how hard the government tries to crack down on dissent, the people aren't going to be quiet."

Civil liberty groups expect the green scare to worsen. The Animal Enterprise Terrorism Act now raises any attacks against the profits of any animal-based industry to the level of terrorism, and a little-known bill making its way through US Congress with virtually no debate is expected to lead to a new crackdown on any dissident activity, under the guise of fighting terrorism.

The Orwellian-sounding Violent Radicalisation and Home-Grown Terrorism Prevention Act, passed by an overwhelming 400-6 vote last month, will soon be considered by the Senate. Rather than seeking to criminalise "extremist" acts, it targets beliefs, or what many people are calling "thoughtcrimes".

"It proposes initiatives to intercede before radicalised individuals turn violent. It could herald far more intrusive surveillance techniques, without warrants, and has the potential to criminalise ideas and not actions. It could mean penalties for a stance rather than a criminal act," the American Civil Liberties Union and the Centre for Constitutional Rights have jointly said.

Back in Seattle, the debate in the blogosphere about who was really responsible for the McMansion fires continues. The police have made no arrests and the trail has gone dead, admits the FBI. The only thing everyone can agree on, says one blogger identifying herself as a "Christian platonist humanist", is that "Someone Did Something Bad".