By ANDREW WHALEN
Associated Press

The last town on a rutted dirt road in Peru's most prolific cocaine-producing highland valley, Union Mantaro has no police post, no church and no health clinic. Its 600 people lack running water and electricity.

Until January, makeshift huts of wood and plastic housed scores of refugees from a government offensive against a small but lethal band of drug-funded rebels, revitalized remnants of the fanatical Shining Path guerrilla movement.

Most have since returned to outlying mountain villages as the rebels frustrated the army's campaign against them, killing 33 soldiers and wounding 48 since the military arrived in August. The rebel death toll is unknown.

The army's setbacks -- the narcotics trade does not appear to have been dented -- are more than a worrisome embarrassment for the central government in faraway Lima. Critics say President Alan Garcia needs to act fast or risk greater instability.

Peru's cocaine trade -- No. 2 after Colombia's -- is booming after a 1990s drop-off. The government calls the insurgents who've used it to rearm ideologically bankrupt, but peasants who have coexisted with them don't necessarily agree.

Coca production soared in this rugged region just 100 miles from the world-renowned Machu Picchu ruins as migrants more than doubled its population to some 240,000 in little more than a decade. Growing the crop, a mild stimulant widely chewed in the Andes, is legal, but authorities say nine-tenths of it goes to the illegal manufacture of cocaine.

''Politicians in Lima don't know what's going on in these communities. If they did, they would know the solution to the problem isn't more soldiers,'' says Marisela Quispe, a government worker who keeps track of victims of political violence.

Experts say the rebel group -- Sendero Luminoso in Spanish -- now has some 400 well-armed fighters in two separate groups. The larger contingent moves with ease in the lush mountains flanking this valley.

It has spies in every village, allies forged through the drug trade who send word when soldiers head out on patrol, says army Maj. Chirinos Carlos Rivera. The locals, says Quispe, see no alternative to the drug trade.

Behind the trappings of a narco-economy -- 4x4 pickups and well-stocked agrochemical stores -- the valley is poor. More than half the people live on less than $2 a day.