I was looking over the digitized script of Pan's Labyrinth, which was included on the two-disc US edition of the film, and I came across a reference to the stutterer as a Galician, as well as a line between Mercedes and Pedro about escaping to Portugal, which forms the southern border of Galicia. Now there are two provinces in the region that directly border Portugal, of which I would bet that Orense is the likely setting for Pan's Labyrinth. Aside from convenient escape to Portugal and the stutterer being Galician, Orense is hemmed in by mountains (perfect for staging guerrilla resistance and consistent with the film's geography) and until recently the main access to the province was by train (in the early version of the script I was perusing, Ofelia and her mother arrive by train). So if anyone had been wondering where in Spain it all went down, I would say, barring contradictory evidence or an official statement otherwise by del Toro, that the mill was located somewhere in Orense.

So the mill did exist at one time in real life?? I know the Spanish Civil war was real but i did not know the area they had Ofelia was real too.

I don't mean to suggest that the mill was real or based on a real place. But if there is a particular area of Spain where del Toro imagined the action unfolding, I would guess Orense. Its features at least seem to coincide most closely with what was described in the film.

yeah Del Toro did a lot of work, the Special Edition Spain dvd for the movie shows in depth all the construction of the place and stuff, it's amazing seeing it, none of that content is sadly in the US version though . . .

Wow, Dan, you thought that out well, I'll have to find Orense on the map later!