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UPDATE 1-AES Gener sees costs rising further at Chilean hydropower project

(Adds detail and comments from statement, background)

SANTIAGO, July 31 (Reuters) - AES Gener, the Chilean arm of AES Corp, said on Monday that it forecast possible fresh cost overruns on its half-finished Alto Maipo hydropower mega-project after continued problems with its construction and contractors.

Alto Maipo was in technical default and was facing over $600 million added to its current debt after ending a construction contract, AES said in a letter to the Santiago stock exchange. As a result, the company said it was in talks with its financial backers and other potential contractors.

Should those talks prove unsuccessful, the company said it would have a material impact that could threaten the continuity of the project.

The problems facing the Alto Maipo hydroelectric project illustrate the difficulties with mega-projects in Chile. Others planned in recent years - such as larger hydropower project HidroAysen and gold mine Pascua Lama - were ultimately halted after facing strong local opposition and ballooning costs.

Alto Maipo, located just outside the Chilean capital of Santiago, was originally budgeted at $2 billion.

Cost overruns have already risen by more than 20 percent, and the project has been the object of regular protests by residents of the Maipo river valley, who say the project would cut off lake water that flows to the Maipo river, affecting the water supply, farming and tourism.

In January, former partner Antofagasta washed its hands of the project, saying it would sell its 40 percent stake.

In March, Alto Maipo refinanced and in June it canceled a key construction contract, citing breach of contract.

That cancellation had triggered the technical default, it said Monday.

"That situation, along with lower productivity than expected on construction contracts, could generate new cost overruns, which the Alto Maipo team are doing their best to quantify and resolve," the company said.

The Alto Maipo construction is over 50 percent complete and AES Gener has invested $536 million in it to date, it added. (Reporting by Rosalba O'Brien; Editing by Diane Craft)