* Diplomatic tension rises ahead of 30th anniversary of war
* Argentina intensifies claim over British territory
* Islanders determined to preserve way of life, status quo
By Helen Popper
STANLEY, Falkland Islands, March 20 (Reuters) - Thirty years after the Falklands War, patriotism is again running high on the islands as Argentina tries to pressure Britain to negotiate their sovereignty.
In the quiet island capital of Stanley, Union Jack flags and red, white and blue bunting are selling fast, and police are urging Argentine visitors - most of them veterans of the 1982 war - not to antagonize locals by waving their own national flag.
Residents of the far-flung, British-ruled territory say Argentines will get a warmer welcome here if their country drops its sovereignty claim for good. But few expect that to happen any time soon.
"The best we could hope for is that they realize the present track isn't getting them anywhere and that they need to start being a little bit more pleasant towards us," said Tim Miller, owner of a Falkland Islands garden center and store where patriotic paraphernalia is flying off the shelves.
A series of tough statements on the Falklands by Argentine President Cristina Fernandez in recent weeks has fueled pro-British sentiment on the disputed islands, which lie nearly 8,000 miles (12,700 km) from London and just a 75-minute flight away from southern Argentina.
Falklands flags and posters reading "British to the Core" adorn many car windows and front porches in Stanley.
"A lot of ordinary islanders who don't normally shout about sovereignty have got pretty worked up about it and that's where it's coming from," said Miller, who lost sight in one eye when he was hit by shrapnel from a British bombing raid during the 74-day conflict.
Some islanders are the descendants of British settlers who arrived eight or nine generations ago. There is a sizeable community of immigrants from Chile but the islands retain an unmistakably British character. Tea and fruit cake is served in the parish hall after Sunday mass at the Anglican cathedral, cars drive on the left-hand side of the road and pubs host darts competitions.
It is not quite a "Little Britain" of 3,000 people at the chilly tip of South America, however.
There is no unemployment in the Falklands and crime is so rare that many residents leave their cars unlocked with the keys in the ignition.
The islands' government had a budget surplus last year and the economy is buoyant, largely due to the sale of fishing licenses. It is getting an added boost from ongoing oil exploration and a boom in Antarctic cruises.
While upmarket goods on supermarket shelves and cafes with wi-fi and lattes reflect islanders' increasing prosperity, newcomers are still struck by the scarcity and expense of some products they took for granted at home.
"Every country is different and while you cringe at the prices and not being able to get some things, it's got so much going for it," said Karen Lee, 38, an accountant from southern England who settled in the Falklands 13 years ago.
"My children have so much freedom and that makes up for the four-pound ($6.34) lettuce or the lack of bananas - we blame the Argentines for that."
Argentine shipping controls put in place in 2010 have disrupted supplies of imported food from Chile, raising the price of fresh fruit and certain vegetables.
The Argentine government has also turned its back on earlier agreements to cooperate on fishing and oil exploration, Falklands officials say.
Argentina is trying to build international support for its claim to the islands, which are called the Malvinas in Spanish, and it has solid backing in Latin America.
Fernandez has urged Britain to follow U.N. calls for dialogue but London says it will only agree to sovereignty talks if the islanders ask for them - something they show no sign of doing.
As the 30th anniversary of the April 2 landing by Argentine troops draws near, islanders insist Argentina should respect their right to self-determination.
"I really hope (the diplomatic dispute) won't go any further because there's no appetite for an increase in tension here and there's no appetite for an increase in tension in the UK .... We rather hope Argentina will calm down," Falklands Governor Nigel Haywood said over tea at Government House last week.
"It would be a much nicer if in the 30th anniversary year we were able to keep looking forward with optimism to the future rather than think 'What's Argentina saying now?'" he said.
Argentina has claimed the territory since 1833, saying it inherited it from the Spanish on independence and that Britain expelled an Argentine population from the islands.
Fernandez, a combative center-leftist who began her political career in the Patagonian region closest to the Falklands archipelago, won easy re-election late last year and her outspoken criticism of Britain as a decaying colonial power strikes a chord with supporters.
While the war is almost universally seen by Argentines as a mistake by the discredited military dictatorship ruling at the time, most believe the islands rightfully belong to Argentina.
Islanders are the first to admit the Argentine invasion saved them from obscurity and gradual neglect by London, guaranteeing their defenses, fishing revenue and breaking their former dependence on sheep farming.
"We don't know where we'd be now if the war hadn't happened. It put us on the map," said Chris Gilbert, 34, who runs a carpet business in Stanley.
"I remember you wouldn't even look at the sell-by date on tins, but nowadays people are fussy. They expect much more."
Plans by British company Rockhopper to start pumping oil offshore in 2016 have raised the stakes in the sovereignty dispute as well as the prospects of a huge windfall for the tiny community.
Locals are trying to keep their feet on the ground about the potential bonanza, which has been estimated at up to $167 billion in taxes and royalties over the years. The Falklands government received 42.4 million pounds ($67 million) in total revenue in 2009/10, primarily from fishing.
"I don't think we'll all be living in castles and driving Rolls Royces. It might be nice but there are lots of other things to do," said Roger Edwards, chair of the Falklands eight-member elected assembly.
"We've always said we'd love to repay Britain for the defense of the islands. If we could repay some of those costs, it would be wonderful."
When it comes to the sovereignty dispute, most islanders say the best they can hope for is a return to the policy of winning hearts and minds favored by Argentina in the 1990s, when the foreign minister sent cartoon videos and greetings cards to children at Christmas.
Such tactics are remembered with a degree of mirth today. But some islanders say the attempts to make friends did go some way to healing relations shattered by the war that killed more than 900 people - most of them Argentine troops.
Ties cooled when Nestor Kirchner, Fernandez's late husband and predecessor as president, took office in 2003, and they have become steadily chillier since then.
"Any progress has been reversed by this government, it's all been lost," said Tony Smith, a local guide who escorts tourists, war veterans and journalists around the islands.
Edwards said he hoped it would one day be possible for the Falklands government to resume cooperation with its neighbor on strategic issues like squid stocks and oil exploration.
"We could still go back to doing a lot with Argentina, but they have to recognize that we're here," he said.
"There's no point in Argentina trying to ignore us because we are here, we are a people in our own right and if they want to change things, they'll have to go through us."