The clean, green reputation of New Zealand - an image worth millions, according to the environment industry - is under threat along with its popular and progressive government in a row over genetically modified crops that is overwhelming this week's general election.

Nearly 4 million voters in one of the last countries in the world where the entire food production is GM-free go to the polls on Saturday, and the outcome of the furious debate is as likely to decide the balance of power as security, health or the economy.

The question dominating the world's first GM election - whether to lift a moratorium on the use of GM technology next year - has split the Labour-led ruling coalition of the prime minister, Helen Clark, after two and a half years of effective and environmentally friendly government. Labour supports lifting the moratorium while the Green party is fiercely against it.

The debate has pitched organic farmers against the agrochemical lobby, university students against business leaders, and husbands against wives. The Federated Farmers group is in favour of GM, while the Rural Women's Association is opposed.

New Zealand's green image has been fiercely protected by its government, which has adopted measures to safeguard its crops and livestock that include Day-glo "Biosecurity Alert" posters urging citizens to report pests, disease or illegally imported fruit, plants and pets. The discovery of one exotic moth recently led to the fumigation of a whole suburb of Wellington.

New Zealand has learned the hard way that meddling with its natural flora and fauna can wreak havoc for hundreds of years. As proof, many locals cite the possum, a cute little Australian mammal that was introduced by the early settlers to create a fur industry. What made good economic sense 200 years ago has today proved a multimillion-dollar eco-disaster. With no predators in New Zealand, the possum population has exploded and they are now one of the country's biggest pests, gobbling up 60,000 tonnes of vegetation a day.

Fearing that engineered crops and livestock could have similarly disastrous long-term consequences, New Zealand has put in place a GM ban that is far more draconian than controls in Europe.

"New Zealand is one of the few countries left in the world where the entire production of food is GM-free," said Jim Kebbell, who runs the country's biggest organic retail outlet. "This is a golden opportunity because consumers don't want GM and, if we keep the moratorium, we'll be the only ones who will be able to satisfy them."

The debate reflects a deep and dogged interest in environmental issues stretching back to the outrage at the attempted sinking of Greenpeace's Rainbow Warrior in Auckland harbour in 1985 and the government's refusal to allow US warships carrying nuclear weapons into its ports.

National identity

But the issue also raises questions about the country's economic future and national identity. New Zealand has more at stake in the GM debate than any other developed nation because it relies on agriculture for 50% of its economic activity and exports - a figure five times higher than the OECD average.

Until now, the naturally green archipelago has kept its GM technology firmly locked up in the labs. Those in the farming and biotechnology community who want to unlock the doors have their uniquely local ideas for its use. Among them are a GM birth-control carrot for possums and GM cow's milk for the treatment of multiple sclerosis.

"On large animal research, we are ahead of the rest of the world, but unless we commercialise it, we will lose that advantage," said Francis Wevers, head of the Life Sciences Network lobby.

Such differences were supposed to have been settled by a royal commission, which reported last October after a year-long study. But its recommendation that New Zealand should move cautiously towards GM technology sparked the biggest street demonstration seen in the country since the anti-nuclear campaign in the 1980s.

More aggressive protests have been carried out by hardline groups such as Rage (Revolt Against Genetic Engineering) and the Wild Greens, including the destruction of a bio-research site in Christchurch in February. The Green party has also adopted an uncompromising stance. Having supported the Labour administration for two and a half years, they astonished Ms Clark two months ago by announcing that they would walk out of the coalition if she went ahead with plans to lift the moratorium in October next year.

The prime minister said their "fundamentalism" over GM risked gains made on other environmental issues such as opposition to whaling and support for the Kyoto pact on greenhouse gases.

"The behaviour of the Greens has tipped over into madness. They are threatening to pull down a progressive government that is among the most environmentally friendly in the world," Ms Clark told the Guardian. "In no other country is it seriously contended that organic farming and genetic engineering can't coexist. It is extraordinary that the idea has taken root here."

But the prime minister has struggled to get her message across, especially since the mid-campaign explosion of "Corngate" - a scandal that saw the government accused of covering-up reports that the US-based company Novartis may have unwittingly imported tens of thousands of GM corn seeds.

The scandal - detailed in the book Seeds of Doubt by an investigative journalist - suggested that Ms Clark had buckled to the demands of the agri-business lobby. When confronted with these accusations during a televised interview, the usually unflappable prime minister threw a tantrum in which she accused the show's host of ambushing her, the Greens of a conspiracy and the book's author of shoddy journalism.

Though Ms Clark dismisses Corngate as a media concoction, the damage has been done. In a poll last week, voters said that the GM issue was a more important election issue than the economy. With Labour's ratings slipping from 56% to 46%, Ms Clark is drifting further from an outright majority.

The Greens, meanwhile, are on course to double their share of the vote to 12%. Under New Zealand's system of proportional representation, this would probably make them the third biggest party in the 120-seat parliament.

The leader of the Greens, Jeanette Fitzsimmons, says she is confident that the prime minister will "roll over" on the GM issue if her party holds the balance of power. Ms Clark, however, is adamant that the Greens have ruled themselves out of a coalition with their ultimatum on the moratorium. A GM deadlock looms.

"Four years ago, few could have predicted that genetic engineering would be such a huge issue in an election campaign," said Tim Bale, a political scientist at Victoria University. "But that is because the economy is sorted. This is not an election about standard of living but about quality of life."

The fruits of New Zealand's GM research:

• Birth control carrots Since British settlers introduced the possum into New Zealand to try to create a fur industry, the population has exploded to more than 60 million. Currently, pest control relies on poisoned carrots, which also kill cats, dogs and rabbits. GM scientists are developing a carrot that expresses a protein that disrupts the reproductive system of female possums.

• Multiple sclerosis treatment milk Scientists working for AgriResearch in Hamilton have genetically modified half a dozen calves so that they will produce milk rich in myelin basic protein, which is thought to help sufferers of multiple sclerosis. The calves will come to lactation in five or six months.

• Sterilising pine trees A species of tree imported from North America is spreading too quickly across a wide area. To prevent this, GM researchers at the Forestry Research Institute of Rotorua are trying to sterilise the pollen to interrupt the trees' reproductive cycle.

• Climate-change resistant grass Wrightson's, a New Zealand agri-firm, has engineered forage grasses such as rye and clover to give a 60% increase in annual growth and milk yield. They plan to put it into crops to make them more resistant to drought and salinity, which will be necessary, say pro-GM advocates, if climate change results in more extreme weather conditions.