A long-planned project to line the All-American canal has triggered the latest diplomatic dispute over water management at the U.S.-Mexico border.   The project has been delayed by a lawsuit in U.S. federal court backed by an unusual alliance of Mexican and U.S. environmental and agricultural interests.   This lawsuit, now on appeal, raises interesting legal and diplomatic questions that are sure to have bearing on U.S.-Mexican relations in managing other shared groundwater aquifers along the U.S.-Mexican border irrespective of the particular judicial outcome in this case.   This paper reviews the background of the lawsuit, the legal issues involved, and the short and longer-term implications of the Mexican challenge to the AAC lining project for binational groundwater management on the U.S.-Mexican border.