MEXICO CITY - CHILI westerns and movies about hookers and narcs dominated Mexican cinema during the 1980's and half of the 90's. This low-brow industry, combined with the decrepit state of movie theaters and the influx of home videos, pushed the middle class away from the big screen. Now, however, the arrival of high-tech theater chains and a new generation of Mexican filmmakers have made Mexico the seventh biggest box office in the world. And its film market is still growing while the European and Japanese markets have hit a ceiling.  For major American studios, it is clear that Latin America is an emerging market and that Mexico, in particular, offers a rich vein of filmmaking talent. Last fall, for example, Warner Brothers and Warner International signed Alfonso Cuarón, the 43-year-old director of "Harry Potter and the Prisoner of Azkaban," to a three-year producing contract.  "A completely unconventional contract," said Mr. Cuarón, whose second film in Mexico, "Y Tu Mamá También," written with his brother Carlos, was an international hit and an Oscar nominee for best original screenplay. "It has a foot in different places; it has to do with the great studio pictures, with large budgets that are developed in Warner Brothers in Burbank and, on the other hand, with Warner International that wants to create a local product -- pictures made in Mexico, Latin America and Asia -- whose budgets are in line with local costs."  The average cost of a Mexican production ranges between $1.5 million and $3 million, compared with the average of $103 million that it costs American studios to produce and promote a film. "It's not a business matter," said Mr. Cuarón, whose first film for Warner Brothers was "A Little Princess," an Oscar nominee for best cinematography and art direction in 1995. "I produce because to have the opportunity to back up people who are making their first or second picture, and make this step easier for them, is a privilege. It doesn't matter how many movies, it matters that they're good."  His first production for Warner International will be "Tokyo Boogie," a Uruguayan-Japanese picture directed by Pablo Casacuberta and Yukihiko Goto and filmed in both countries. His next will be in Mexico. Last year, 36 pictures were shot in Mexico, 25 with government assistance and the rest independently. In 1954, by comparison, as many as 121 films were made. But in 2004 the Mexican market recorded box-office revenues of $478 million on 164 million tickets sold, compared with 2000, which brought $185 million in revenues on 67 million tickets sold. "Mexican production should exceed 80 pictures," said Alfredo Joscowicz, director of the Mexican Institute of Cinematography, the government producer. The appetite for Mexican films is growing, but the government has only $15 million to spend this year on co-productions of its choice.  Distributors for American studios have had a strong presence in Mexico since the 1930's, but this was not the case with production. Six years ago, Warner Brothers began a collaborative venture with the Mexican distribution and production company Videocine, headed by Eckehardt Von Damm, and through Coyoacán Films, Warner's Mexican affiliate, helped produce three pictures in which it had a 50 percent share; this year, as Warner International, it is working on two other projects with the same partner.  In that same period, Mexican pictures were some of the most successful box-office attractions in the country, even in competition with movies out of Hollywood. Several have attracted international awards, and three films were nominated for Oscars -- "Amores Perros" (Alejandro González Iñárritu) in 2001 and "The Crime of Father Amaro" (Carlos Carrera) as well as Mr. Cuarón's "Y Tu Mamá También" -- in 2003.  All this has done a lot to raise international awareness of Mexican cinema. But Mr. Cuarón cites a different factor: "Mexican movies accept reality, embrace and express it, and the contact they make with the public is harsh," he said.  Guillermo Arriaga, who wrote the screenplays for "Amores Perros" and Mr. González Iñárritu's "21 Grams," said: "The studios are also interested in bilateral stories that emerge from the border." Mr. Arriaga, best known outside Mexico for his screenwriting, has directed documentaries and one short film. He said demand for his work has grown to the point where both Universal and its specialty film division, Focus, like Fox Searchlight, have expressed interest in financing movies directed by him.  But production costs in Mexico are going up. "It's not as cheap anymore as it used to be," said the director Guillermo Del Toro ("Mimic," "Blade II"), whose next movie, "The Fauno Labyrinth," will be filmed in Spain. And although Mario Aguiñaga, the director of the government's Estudios Churubusco, said that production costs "are 20 percent lower than in the studios of other countries," Mexico has taken steps to stimulate local film production. This year, the government enacted new tax incentives totaling $44 million for qualified Mexican-based film production companies of any nationality. Companies are eligible for a 3 percent tax deduction, once authorized by the two film commissions, Fidecine and Foprocine, according to Victor Ugalde, executive secretary of Fidecine. Other incentives include a 15 percent rebate for foreign production companies working in Mexico.  Alfonso Cuarón's projects for Warner International will originate in the New York office of his company. Though he has yet to settle on the number of movies he'll produce there in 2005, two will probably be shot at the end of the year. Meanwhile, his office in Mexico, run by Juan Tovar, has begun to read scripts and novels. "What is very important is that I'm going to have a lot of creative independence in local productions," Mr. Cuarón said. "The freedom I've been given is impressive."  As for the company's name, that's still up in the air. "I thought of calling it Legal Alien," he joked, "like it says in my passport."
Mexico is emerging as rich source of filmmaking talent for American studios; Mexico's hopes of becoming a moviemaking capital are riding on talent like that of director Alfonso Cuaron, who has been signed to three-year producing contract by Warner Brothers and Warner International; photos (M)