BOISE, Idaho (AP) - The U.S. Forest Service has blocked a Canadian mining company from filling a new holding pond with arsenic-tainted water after holes and other potential flaws were discovered at the site on a creek near Idaho's Sawtooth National Recreation Area.

An existing settling pond constructed by Atlanta Gold Corporation of Toronto-based Twin Mining is not leaking and has been removing some of the arsenic in runoff water flowing from an old mine opening into Montezuma Creek, a tributary of the Boise River.

But Boise National Forest District Ranger Doug Gochnour asked Atlanta Gold to stop construction on a second settling pond June 13. Gochnour found holes in the lining of the new pond above the high water mark and protrusions in the liner at the bottom of the pond that might be sharp rocks, which could puncture the liner and cause it to leak.

An independent engineer hired by Atlanta Gold who visited the site agreed Friday that the second pond should not be filled until the flaws can be corrected.

Gochnour said the company is now studying its options to proceed, but he has been pleased with their cooperation.

Atlanta Gold has proposed spending $41 million to open a mine at the site in 2007 to extract more than 500,000 ounces of gold over five and a half years. It would use cyanide to leach gold from the ore left from old mines and has applied for permits from the Forest Service and other agencies.

The site is in the historic mining district of Atlanta, Idaho, about 100 miles east of the state's capital city.

Atlanta Gold officials blamed the pond liner problem on a rushed construction schedule due to a legal settlement reached in October with the Idaho Conservation League. The environmental group sued Atlanta Gold in federal court, claiming the company was violating the federal Clean Water Act by allowing the arsenic-tainted water to continue to drain into Montezuma Creek.

Bruce Thorndycraft, manager of the Atlanta project, said the company was forced by the settlement to begin building the holding ponds last fall instead of waiting until the spring construction season.

"They insisted they wanted something done now, so we did something now," he told The Idaho Statesman newspaper.

But J.R. Robison, a spokesman for the conservation group, said the settlement gave Atlanta Gold the option of delaying construction because of weather. He said the company had stalled cleanup all last summer before the settlement was reached.

"Atlanta Gold has been sitting on this problem for years," Robison said. "They have a responsibility to protect clean water, and they have an obligation to follow through with their agreements."

Although the state of Idaho is not a party to the settlement, regulators have also criticized the mining company for substandard work on the containment ponds. Idaho Department of Environmental Quality Mining Coordinator Bruce Schuld sent Atlanta officials a letter Friday questioning their ability to protect water quality in the Boise River watershed, which is a growing source of drinking water for residents of the state's largest city.

He said the company could have used the wastewater treatment pond project as a way of demonstrating their technical expertise and environmental commitment.

"We believe that Atlanta Gold missed taking that opportunity," Schuld said.