Europe's first fish ranch is under construction and already providing food for thought. As its creators hoped, lobsters and other shellfish have made the £1 million reef their home. Now they have been joined by gadus morhua - cod, the holy grail of Britain's seafood industry.

A marine habitat consisting of thousands of concrete blocks is being put in place on the seabed of Loch Linnhe, near Oban, to create the world's largest experimental artificial reef that will attract fish, prawns and crabs and the prized West Coast lobster.

In the long term, the project could offer a commercial lifeline for the area's smaller traditional inshore fisheries, struggling to survive against European restrictions and competition from gluttonous trawler fleets.

Tom Wilder is working on the project for the Scottish Association for Marine Science. 'We are trying to optimise the conditions fish live and grow in. It might be possible to develop a situation where you can actually ranch the seabed,' he told The Observer .

Early indications from the project near the island of Lismore are extremely encouraging, according to researchers. Dr Martin Sayer, the project director, said: 'There are already large numbers of juvenile cod and other cod species. They will only stay there the first year of their life, but they will have a chance to grow before they move away to other areas.

'Initial results show there are positive results just from visual records alone. You can actually see the number of animals that have been attracted to the area.'

Blocks weighing up to 40kg have been placed in the water to create the reef structures, which act as a shelter for fish and shellfish to breed. The reef is scheduled to be completed in two years, by which time a million blocks will have been used towards its construction.

Fish farms pepper the lochs and bays of Scotland's west coast and the aquaculture industry is looking to diversify from it core products of salmon and trout. But concerns about sea lice, chemicals and waste from fish farms continue to plague the industry. Last week it was hit by restrictions on the use of canthaxanthin, which dyes salmon flesh red, amid fears that it can have a detrimental effect upon human retina.

Fish ranching, though, appears to offer a cleaner alternative for nurturing salt-water species. Don Staniford is one of the world's leading campaigners against fish farming, yet he welcomes experiments with artificial reefs such as that at Loch Linnhe - the first to be constructed in cold waters.

'This could be a win-win situation,' he told The Observer. 'It is sad that we have arrived at a juncture when we must artificially encourage the growth of fish stocks. Years of factory fishing and interfering with nature have taken their toll, but if we can help sealife recover by working with nature, then it has to be seen as a positive move.'

However, Staniford gave a warning that reef developments had to be strictly monitored, as any pollution could have a devastating effect on the food chain. 'We do have concerns about the types of concrete blocks used. You can't just go dumping anything in the water, as leakage of heavy metals into the sea could contaminate fish.'

The Loch Linnhe project is a partnership between the Scottish Association for Marine Science and a local quarry which provided the materials now being dropped offshore. It has faced opposition from environmentalists and local fishermen who feared the quarry was simply looking for a way of getting rid of unwanted material by the back door.

Hugh Allen, of the Mallaig and North West Fishermen's Association, said: 'We were worried about the chemical and physical stability of the concrete. These breeze blocks are the quarry's waste material and ash from power stations is used to bind them, so the scientists must keep a close eye on them to ensure there is no leakage.

'We helped the team find a site that was not in fishing waters, as the blocks may have presented a danger to boats, but it must also be remembered that things move in the sea - even large chunks of concrete - and we need to ensure that they do not shift to areas that boats frequent.'

But Allen is hopeful that the experiment could provide results that will transplant to other lochs and sections of coast.

'It does seem that lobsters in particular are attracted to this reef - in waters where there were no lobster before. If this is deemed a success and repeated elsewhere, it could be good news for fishermen.'

Marine scientists insist the levels of heavy metal in the reef concrete are no higher than occur naturally and are confident that they can help fishermen take advantage of the all-time high demand for lobsters.