* Chavez government cancels Canadian company's permit

* Crystallex (KRY

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) shares fall 35 pct

* Las Cristinas may have region's biggest gold deposit

By Diego Ore and Euan Rocha

CARACAS/TORONTO, Feb 7 (Reuters) - Russian-Canadian miner Rusoro is eyeing Venezuela's Las Cristinas gold project after President Hugo Chavez's government canceled Crystallex International's (KRY

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) permit, sending its shares down 35 percent.

The mine, south of the Orinoco river and near a town bearing the name of the mythical golden city of El Dorado, may hold Latin America's biggest gold deposits, studies have shown.

But a decades-old saga over its development underlines the risks of doing business in Venezuela, where the lure of vast natural resources has been dulled by rule changes, economic difficulties and Chavez's "21st century socialism" project.

Some locals even say the mine is cursed.

"If the government is interested in working with us on the project (Las Cristinas), we are ready to tackle this challenge with the necessary international financing," Rusoro's president in Venezuela, Andrea Padovani, told Reuters on Monday in a telephone interview.

"If the government would like our help to start this project, of course we are going to accept the challenge."

Las Cristinas was Crystallex's (KRY

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) largest asset. The Canadian company's shares were down 35 percent, or 8 cents, at 15 Canadian cents in afternoon trade on Monday.

A source at the Mining Ministry confirmed to Reuters that the contract was canceled, and said state-owned Corporacion Venezolana de Guayana would take over its concession.

Crystallex (KRY

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), which raised C$35 million in June for Las Cristinas, said it had met all its legal obligations and was considering what steps to take to protect its investment.

The company's fortunes have withered over the last three years as Chavez nationalized large chunks of the economy in South America's leading crude oil producer.

The former soldier, who sometimes announces major nationalizations during ad hoc TV addresses, has moved to bring the mining industry more firmly into state hands.

In 2009, the government seized Gold Reserve's (GRZ

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) Brisas project, adjacent to Las Cristinas.

"CURSED" GOLD MINE?

Many analysts had expected it was only a matter of time before the government made a similar move on Las Cristinas, where work had been stalled for three years by the Venezuelan authorities' refusal to issue a construction permit.

With progress at Las Cristinas stalled and diminishing funds, Crystallex (KRY

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) was forced to raise C$35 million through an equity issue in mid-2010. The company also attempted to form a joint-venture to develop Las Cristinas with a Chinese state-owned company, but those plans were stymied by Venezuelan authorities.

No company has extracted ore from Las Cristinas since the government expelled Italian adventurer Amalfi Grossi who operated the mine in the 1980s. Locals, who once found a one kilogram gold nugget there, claim Grossi cursed the mine.

Canada's defunct Placer Dome came closest to opening the area as a world class mine. But after investing millions it sold its stake for $50 when gold prices declined. Frustrated with the lack of progress, Chavez kicked out Placer Dome's successor, Canadian mining operation Vannessa Ventures, in 2002 and handed the rights to Crystallex (KRY

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).

While the fortunes of Crystallex (KRY

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) and Gold Reserve (GRZ

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) have ebbed, those of a third Canadian-listed gold explorer operating in Venezuela seem to have improved.

In 2009, Chavez said he planned to give control of the Las Cristinas and Brisas concessions to Venrus, a joint-venture between his government and Rusoro, a TSX Venture Exchange-listed company with Russian ties.

The Brisas and Las Cristinas deposits together hold more than 25 million ounces of gold, according to the most recent studies issued by Gold Reserve (GRZ

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) and Crystallex (KRY

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).

With Chavez courting businesses from political allies including Russia, China and Iran, Rusoro has consolidated its position in Venezuela over the last five years.

In 2007, it completed the acquisition of Gold Fields' local assets, including the producing Choco 10 mine. A year later, it was named the partner of choice by the Chavez administration for developing gold projects within the country.

At the same time, Rusoro said it was acquiring Hecla Mining's Venezuelan assets, which include the Isidora mining leases and the La Camorra mill facility.

"We are sure Venezuela has much richer areas than Las Cristinas that have not been adequately explored to determine their reserves," Rusoro's Padovani said in the interview.

Rusoro shares have risen more than 125 percent in the last six months, while Crystallex's (KRY

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) have more than halved in the same period. Rusoro's shares were up 4 percent at 40 Canadian cents a share on Monday. ($1=$0.99 Canadian) (Writing by Daniel Wallis; Editing by Andrew Cawthorne and Toni Reinhold)