A CONTROVERSIAL court battle pitting a Denver-based water development corporation against more than 30 challengers is now under way here.It's a case that could determine whether developers can pump 200,000 acre feet of water - 65 billion gallons - out of the rural San Luis Valley annually to help quench the thirst of Denver and other heavily populated Front Range communities. Battles over water are nothing new in the West. But this one has residents in the poorest section of the state so upset they voted 8,700 to 136 last year to tax themselves $472,000 to fight the plans to tap one of the largest aquifers in the West. (Two valley aquifers contain 2 billion acre feet of water, the United States Geological Survey estimates.) Caught in the middle of this battle is the Great Sand Dunes National Monument, 55 square miles of sand that could be this project's very own "spotted owl," thwarting American Water Development Inc.'s (AWDI) water development plans. The San Luis Valley has a rich Hispanic heritage and boasts Colorado's oldest community in the town of San Luis. Valley farmers raise a wide range of crops. AWDI's challengers include the federal government, water conservancy districts, state agencies, local governments, and angry valley residents. AWDI attorney Jack Ross termed local opposition xenophobic and suggested that the court would have to decide whether the water would be forever locked up to "serve the selfish whim of a few." The company must prove that the water it seeks is "non-tributary not connected to area streams or the shallow water table that provides the water in most existing valley wells. Colorado utilizes a complex formula for determining whether water is tributary; the state has determined that the water sought by AWDI is tied to the region's other water resources. But the Great Sand Dunes, at the base of the western edge of the majestic Sangre de Cristo Mountains and square atop the aquifer, might be AWDI's biggest hurdle. The dunes, perhaps 15,000 years old, rise to a height of 700 feet. Experts calculate that if the sand were dumped into railroad boxcars they would circle Earth 20 times. Despite its dry appearance, the sand is extremely moist just inches beneath the surface. Some argue that the moisture is absorbed from the groundwater and two nearby creeks and is what holds the dunes together; a decrease in that water, they say, could have an extraordinary impact on the dunes. "The dunes would virtually disappear - not within our lifetime, but within our children's children's lifetime," says Dion Stewart, who last fall headed a first-ever drilling project there. He declined to discuss results pending presentation of his data in court. Oil exploration geologist Steven Fryberger, an AWDI consultant, disagrees: The moisture "can have an effect on sand movement, but it's not enough to lock a dune in place. Most of the water that I have observed [at the dunes] is the result of precipitation; it does not rise from the water table." Photographic evidence has shown that the dunes today look much as they did 60 or 70 years ago, says Sand Dunes superintendent Bill Wellman. He believes the dunes, creeks, and groundwater have a very delicate ecological relationship. "We are still convinced that removing big quantities of water would have a devastating effect," says Mr. Wellman. "There's a real strong relationship between the unique nature of these dunes and the water." He argues that "what worries AWDI is that you can't mitigate damage" to a unique resource like the sand dunes. "How do you mitigate damage? As far as we can tell, you don't." AWDI was founded by Canadian entrepreneur Maurice Strong, who has been slated to head the 1992 United Nations Conference on Development and the Environment. He has left the company but owns property north of the sand dunes in Crestone, Colo., where AWDI would locate about 100 wells. The company's board of directors includes former US Environmental Protection Agency administrator William Ruckelshaus, former Colorado Gov. Richard Lamm, and Canadian investor Samuel Belzberg. Mr. Lamm says he considers this "the most environmentally benign and efficient way for Denver to get additional water. If you assume that Denver is going to continue growing, this is much better than ... any of the other alternatives. "They have the people down there so riled up that there is no compromise possible," he says. AWDI vice chairman Alexander Crutchfield Jr. says he expects to get defeated in Alamosa. "We'll probably go to the [state] supreme court." Justice Department attorney John Hill, who represents the monument and other federal interests, has suggested that AWDI doesn't have any water buyers. Mr. Crutchfield, however, insists they could supply water to communities in Colorado, New Mexico, Texas, and possibly California. In Washington, Sen. Tim Wirth (D) of Colorado this month introduced legislation that would deny federal permits for the removal of water if such a plan adversely affected the sand dunes, an existing water development project known as Closed Basin, area wildlife habitat, or existing Rio Grande water agreements.