Amid the wreckage of the devastating earthquake that recently ripped through this corner of the Tibetan plateau, local people are rebuilding their livelihoods with one of the world's most ghoulish parasites – the caterpillar fungus.

The government has accorded extra importance this year to the annual picking season for the ingredient, prescribed in traditional medicine to cure cancer and also nicknamed "Himalayan Viagra" because of its alleged aphrodisiac qualities.

But the growing dependence of the local community on this remarkable crop has prompted violent confrontations between rival pickers and is now stoking concerns that the mountain hillsides may one day be harvested empty.

The Cordyceps sinensis fungus is known locally as Yartsa Gunbu or "summer grass winter worm", named after the transformation that takes place as it devours its host, the ghost moth caterpillar, from inside out during the latter's hibernation on the mountain grasslands.

The fungus briefly grabbed the world's attention in 1993, when the Chinese national athletics coach Ma Junren credited it with the stunning success of three female runners who came from nowhere to break five world records in one competition.

Western studies suggest the fungus may protect the liver. But its benefits are already treasured in Asia, where it is prescribed by doctors and given as a luxury gift, often literally worth its weight in gold.

Thanks to the expansion of this market, the value of Yartsa Gunbu has increased more than ninefold since 1997, creating what mycologist Daniel Winkler calls a "globally unique rural fungal economy" on the Tibetan Plateau.

This month, the government earmarked caterpillar fungus collection as one of three industries that it will focus on to revitalise the region in the wake of the 6.9 magnitude quake that struck on 15 April. Along with the export of migrant workers and Tibetan mastiff breeding, it is a mainstay of family incomes.

These yellow-brown organisms account for four out of every ten dollars earned by rural Tibetans and provide a bigger boost for the economy than the combined revenue from manufacturing and mining, according to Winkler.

In recent years, Yushu – close to the border with Tibet – has been at the centre of this fungal gold rush, making it the fastest growing economy in Qinghai Province.

The town's central market is dominated by fungus sellers, each haggling behind a table or basket filled with what looks like a mass of yellow and brown worms.

To improve sales, some traders employ local women to clean the dirt off of the fungi. They earn 100 yuan per day – a better income than most Chinese factory labourers – as they sit in circles on the pavement chatting and scrubbing the long, slim cordyceps with brushes.

Higher up the value chain, a strata of budding fungal entrepreneurs have emerged in recent years. Depending on the size and quality, the fungi are sold here for 25 to 35 yuan each, or about 40,000 yuan per kilogram. At the end of the retail chain, the best fungi can fetch up to 360,000 yuan per kilogram – more than gold.

Tsuren Pingcuo, one of Yushu's fungus dealers, claimed he could make hundreds of thousands of yuan a year from the trade.

"The caterpillar fungus is everything to the people here. We all depend on it for a living," he said. "I used to work for the government, but now fungus is my business. It has changed my life. I'm rich."

He insisted that the harvesting of the fungi does no damage to the environment, but high on the hillsides near Longbaozhen – the epicentre of the quake – pickers say the business is unsustainable.

"When I was young, you used to be able to find the fungi everywhere near my home, but now you can spend a whole day on the slopes and you are lucky to find ten," said Tashi Duzhu near Longbao. "There are too many people doing it now. Every year, there are more and more."

The high-altitude harvest is gruelling. Collectors spend 12 hours a day scouring the hillsides for the slim, 2cm stem-like protuberances that stick out of the earth.

In extreme cases, scarcity has led to gun and knife battles over prime fungal turf. In July 2007 eight people were shot to death and 50 wounded in one such conflict. "There are fights every year and occasionally people are killed," said Tsamba Chunpin, another picker.

Last week, scientists and senior officials from the national and local government state joined a caterpillar fungus conference in the provincial capital Xining to consider how to harvest the crop sustainably despite growing pressure from consumers.

"China has conducted research on environmental management, artificial cultivation, and product development," said Gao Hongbin, deputy minister of agriculture. "With scientific management and strict regulation, we can maintain the continued increase in the incomes of local farmers."