LOS ANGELES (FORTUNE Small Business) - It's a warm, sunny afternoon in Beverly Hills. Celebrity jeweler Neil Lane is cruising across town in his convertible Mercedes, mellowing out to doo-wop music. Lane's morning has been frenetic: One moment he was on the phone haggling with fashion designer Tom Ford about insuring several million dollars' worth of diamonds for a Vanity Fair spread; then Charlize Theron's stylist called about a necklace for a Gucci party that night in Theron's honor. Not to mention quick chats with Nicole Richie and Mary Kate Olsen, who just like gabbing with the affable Lane.

Now, with the breeze whipping through his sparse hair, Lane is happy to steal a few quiet moments before the next fashion crisis. "I don't have time for myself anymore," he sighs.

Neil Lane at home in L.A.

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Lane isn't really complaining. The jeweler creates red-carpet rock candy for the likes of Barbra Streisand, Madonna, and Renee Zellweger, plus enough royal weddings to keep paparazzi cameras clicking forever. "I love Neil Lane's diamond balls," Madonna winked in an e-mail to FSB, referring to Lane's eye-popping, gem-studded bubble brooches. "He is one of the most innovative jewelry designers in the world."

But Lane's cozy niche could be at risk as he moves to grow his business through a partnership with the controversial diamond-mining colossus De Beers.

After graduating from high school in 1974, Lane spent two years in Paris studying painting at L'Ecole des Beaux Arts. In his spare time, Lane developed a taste for vintage jewelry by haunting Parisian flea markets. Back in the States he poured his artistic talent and collector's passion into unique jewelry designs.

In a city of ritzy boutiques, Neil Lane Jewelry still operates out of the tiny booth in a low-rent jewelry outlet on Beverly Boulevard where he launched his business in 1989. The contrast between his frugal digs and high-end designs has helped define Neil Lane Jewelry, which he says generated revenues in the $50 million range last year. "I sell out of the worst possible location," says Lane, 49. "It's not a walk-in. It's more of a destination, and I prefer it that way. I'm not interested in air-kissing. I want to connect."

Lately Lane has been forging connections well beyond his customer base of celebrities and the well-heeled American women who buy his designs because they see celebrities wearing them. The jeweler recently signed a deal with the Arab luxury brand Altayer to sell his jewelry in high-end boutiques in Dubai. He is also producing a signature jewelry collection for Saks Fifth Avenue. (Prices range from $8,500 for a set of platinum and five-carat diamond hoops to $200,000 for a 25-carat diamond ring.)

"My momentum is starting to feel right," says Lane. "I mean, I could sit down right now and design 20 rings. I saw a woman this morning wearing a charm bracelet, and already my mind is turning over with ideas. I'm feeling very fertile right now," he adds, smiling mischievously. "I could sell my eggs."

Lane's most promising--and riskiest--venture is a newly minted partnership with De Beers LV, a four-year-old retail joint venture between the De Beers Group and the French luxury conglomerate LVMH (Research). Lane has agreed to produce an exclusive line of jewelry that De Beers LV will sell in its fledgling chain of retail stores, expected to reach 150 worldwide over the next five years.

Last year the De Beers Group mined 40% of the world's supply of unpolished diamonds from concessions in southern Africa and controlled an additional 25% of the global diamond trade through its London-based Central Selling Organization. The private company reported $6.5 billion in 2005 revenues, a company record.

But to date De Beers has had limited success in the retail jewelry business. De Beers LV has cost the De Beers Group $120 million to date and reported 2005 sales of just $30 million at its ten stores worldwide (a successful high-end jewelry business can easily pull in that much revenue from a single location).

De Beers LV hopes that Lane's trademark style--a colorful fusion of 1890s Art Nouveau and modern motifs--will attract younger, trendier customers and help the company redefine its brand. "Our challenge is to move from a commodity business to a luxury-brand business--to trickle up, so to speak," says De Beers LV CEO Guy Leymarie. "Neil is a true jeweler and influential personality in Hollywood who can help put De Beers on the map. He's our ambassador."

At first glance it seems a natural partnership. Lane provides the A-list sizzle that the 117-year-old De Beers needs to extend its mining and wholesale franchise into the lucrative retail jewelry trade; De Beers gives Lane access to an international market of affluent consumers outside the entertainment industry.

Yet in Hollywood, a town in which celebrity and social activism have long fueled each other, Lane's association with De Beers carries considerable risk. For generations De Beers bought diamonds from virtually any supplier without asking many questions about their provenance. That policy, critics charge, helped fuel bloody conflicts in Sierra Leone, Angola, and the Democratic Republic of Congo, where millions have died in civil wars fought largely over diamonds and other mineral resources.

More recently the company has drawn fire for allegedly driving Botswanan Bushmen off their ancestral homelands in the Kalahari Desert to make way for future diamond mining. "Neil Lane needs to get out and see for himself how De Beers conducts business," says Stephen Corry, director of Survival International, a London human rights group that recently called for a boycott of Lane's jewelry. Joined by feminist icon Gloria Steinem, Cultural Survival picketed the gala opening of De Beers' new store in Manhattan last year.

Ominously for Lane, "blood diamonds" have become a Hollywood social cause. Supermodel Iman was once a De Beers spokeswoman but severed her ties to the company over the blood-diamond issue. Actress Julie Christie has lent her name to Survival International's campaign against De Beers. Last year rapper Kanye West released "Diamonds From Sierra Leone," a graphic music video that depicts bloodthirsty West African warlords who kill and maim children in pursuit of diamond wealth. And Warner Brothers (owned, like FSB, by Time Warner) recently started production on The Blood Diamond, a dramatic thriller set in Sierra Leone during the civil war of the late 1990s. The film stars Leonardo DiCaprio as a diamond smuggler racked by guilt over personal gain derived from savage violence.

Lane admits to being troubled at times by De Beers' history. "I grew up idolizing De Beers," he says. "I didn't know about all the negative stuff, just that its diamonds were worn by the most famous people in the world. But when the company first approached me about partnering, I started looking into it because I was hearing all this $#&% about blood diamonds."

Nevertheless, Lane is intent on finding a bigger audience for his designs than he can reach from behind his jewelry counter in Beverly Hills. After several get-to-know-you meetings with De Beers executives, he decided that the potential monetary reward of the partnership outweighed the risk of an activist backlash. "I'm not going into this blindly," he says. "I know that some people will be fixated on the blood diamonds issue, and I have to respect that."

In recent years De Beers has moved to distance itself from the blood-diamond trade, pledging to stop buying stones from freelance diamond traders in Africa. The company urges its customers to avoid buying diamonds from strife-torn African countries. It recently vowed that the Central Selling Organization would not distribute diamonds from any area in Africa controlled by rebel forces fighting against a legitimate, internationally recognized government. De Beers has also backed the development of advanced "fingerprinting" technology that might someday be able to identify the geographical origin of any diamond on the market.

"I told Neil early on that he had to decide how he felt about our history and our reputation," says Leymarie. "I told him that if he didn't feel good about it, then I didn't want to partner with him." Corry of Survival International is unimpressed. "What does Lane expect De Beers to say?" he snaps. "The company has launched a vigorous propaganda exercise to market an image of clean hands."

It's too early to judge the financial success of Lane's deal with De Beers. "We've only been married for three months," says Lane. "We're still in the honeymoon period." Last December, De Beers launched the Neil Lane Hollywood Collection at a new boutique on Rodeo Drive. Since then the store has sold five of Lane's diamond necklaces at about $50,000 a pop. So far Lane hasn't lost a single celebrity client to the blood diamond controversy. In Hollywood, it seems, social activism doesn't quite trump the lure of high-class bling.

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