When the Hetch Hetchy valley - often called the prettier twin of its famous neighbour, Yosemite - was flooded in the Twenties, no one thought it would be seen again. Its loss was mourned by the nascent environment movement, and especially by the naturalist John Muir, who had fought to save what he called a 'mountain temple' because of its spectacular scenery.

Now hopes are high that Hetch Hetchy will re-emerge in one of the biggest restoration projects on American soil. It could cost billions and take years, but its proponents say it would herald a new age of restoring damaged eco-systems. 'It is an idea whose time has come. This is a signal of hope. This will show that the Earth can restore itself,' said Ron Good, founder of Restore Hetch Hetchy, the group spearheading the project.

There are certainly grounds for optimism. Knocking down the dam and restoring the valley to wilderness has been an ambition of many people ever since it disappeared. A concerted effort in the late Eighties came to nothing, but this summer the California state government published the findings of a huge probe into the viability of the project. Its conclusion: that restoring Hetch Hetchy was both viable and potentially desirable. Environmentalists have also been given an unexpected boost from Republican Governor Arnold Schwarzenegger. The film star won a second term based mostly on a dramatic shift towards being green and has said the project needs more research. 'The political winds are moving in the right direction,' said Good.

The scientific winds are pretty much already there. The valley has lain under 90 metres (nearly 300ft) of water for eight decades and the first task will be to knock down the huge dam that flooded Hetch Hetchy in the first place. Then the landscape underneath will have to be restored to its wilderness state, allowing animals and plants to flourish. Some scientists favour a phased restoration, draining the reservoir bit by bit and experimenting to see which methods work best to keep out non-native plants. 'There are many unknowns. At the moment we really don't know what exactly will work best unless we give it a go,' said Joy Zedler, an ecologist at the University of Wisconsin, who has created a phased restoration plan.

Scientists hope to learn much about how to restore a landscape from what is likely to be little more than a moonscape of mud when first revealed. That knowledge will boost reclamation projects around the world. Zedler believes they will amass information that will be used globally, even as other countries - such as China, with its Three Gorges project - keep building big dams. 'They'll knock that dam down and restore it too one day. The next generation is going to be the restoration generation,' said Zedler.

No one is pretending that recreating Hetch Hetchy will be easy. The soil will probably have changed after being soaked in water and covered in sediment. The rare lichens that covered the cliff walls will have died. There will be a 'dirty ring' around the whole valley similar to a tide mark or, more prosaically, a ring of dirt around a bath tub. The biggest task would be knocking down the dam. The tallest one previously dismantled was just 20m high, one-fifth of the height of Hetch Hetchy. Removing it will generate about half a million cubic metres of concrete and cost at least $900m.

There are other issues. About 2.4 million residents of San Francisco and the Bay area use water from the reservoir, and it generates vital hydroelectric power. To keep water flowing to consumers, there will have to be a 're-plumbing' of much of central California's water supply, and a new source of electricity will need to be found. Official estimates vary on the total cost of the project - from $3bn to $10bn - though environmentalists put the bill at 'just' $1bn.

Opponents say the high costs show that the project is a non-starter, but its backers say the opposite: if money is the sole object, they will find ways to get it. There is certainly huge optimism among supporters of Hetch Hetchy, who now include celebrities such as Harrison Ford, who has helped to make a documentary backing the plan. 'I get more optimistic every day,' said Zedler.

Knocking down dams is increasingly accepted by Americans, more and more of whom see them as unnecessary and ecologically damaging. In the Olympic National Park near Seattle in Washington state, two large dams are being taken down in a restoration project costing $185m. It is scheduled to begin in 2009. In the Florida Everglades a staggering $10.5bn has been set aside to restore the threatened wetlands landscape.

If the Hetch Hetchy project does succeed, California would end up with a second version of Yosemite, the famous national park that attracts three million visitors a year. It will be a natural wonder and a paradise for hikers and climbers. The valley was once full of savanna and oak and pine forests, with waterfalls and huge cliffs in dramatic colours. It was also home to the Paiute and Miwuk Native American tribes, and its name is derived from their word for a type of edible grass that used to grow there.

When Muir, who founded the Sierra Club environmental group, visited the valley he often described its beauty in quasi-religious terms. When first told of plans to dam it he replied: 'Dam Hetch Hetchy? [One might] as well dam for water tanks the people's cathedrals and churches, for no holier temple has ever been consecrated by the heart of man.'

Good agrees with those sentiments. He believes work could start on the project as soon as 2013. 'This is happening. This is for real. I will feel wonderful when I visit it for the first time. People all round the world will applaud,' he said.