Argentina has appealed to the UN's highest court to order Uruguay to halt construction of two paper mills it says will pollute their border river.
The mills are being built by a Finnish and a Spanish company
The Argentine government wants construction stopped to allow further environmental studies to be conducted.
Uruguay says the mills will adhere to the strictest rules and bring badly needed jobs to the border area.
The row has provoked months of protests and strained traditionally warm ties between the two countries.
The International Court of Justice at The Hague is holding an initial two days of hearings on whether construction should be frozen pending further talks and an environmental report.
The mills are being built on the Uruguayan side of the River Uruguay that separates the two South American neighbours.
Argentina argues that they will pollute a region dependent on agriculture and tourism.
The head of Argentina's delegation, Susana Ruiz Cerutti, said Argentines had "mixed feelings" about taking the issue to the ICJ but felt obliged to on environmental grounds.
"We are not happy about having to take up our right in the International Court of Justice against Uruguay, with which we have established historic, social and cultural relations that go beyond good neighbourly relations," the French news agency AFP quoted her as saying.
Under a 1975 treaty, all issues concerning the River Uruguay must be agreed by both countries.
Uruguay approved one mill in 2003 and has "aggravated the dispute" by authorising a second one, the Argentine application to the court said.
"Uruguay has infringed and continues to infringe the treaty," Ms Ruiz Cerutti told the court.
Uruguay argues that the Spanish and Finnish companies building the mills will use the latest technology to avoid pollution, and the $1.7bn (£920m) project will stimulate the local economy.
"Claims the mills would led to irrevocable environmental damage are unsupported and unreasonable," said Alan Boyle, a professor of international law speaking for Uruguay.
There was no risk of pollution and it was bad faith to argue so, Uruguay's representative Hector Gros Espiell said.
There have been mass protests in Argentina against the mills, including in April when thousands blocked traffic crossing the bridge between the two countries.
Environmentalists have also demonstrated in Uruguay.
The ICJ usually takes three to four weeks to decide on issuing provisional measures. It would only then study the substance of Argentina's complain, which could take several years.