"The explosion was a chance accident, a misfortune that occurred to this community member while he was completely intoxicated," said Deputy Internal Affairs Minister George Perez.
Perez dubbed "completely false" claims by a community spokesman that the death occurred as part of clashes between security forces and the protesters, who are holding five employees hostage and demand the mining subsidiary be expelled.
Interior Minister Carlos Romero said the protesters ambushed security forces.
"A group of policemen climbed a hill to view the situation and were surprised by at least 300 villagers. The soldiers fell back," Romero told Cadena A television.
Perez had earlier insisted there had been no gunfire during the incident, in the Malku Khota region, about 550 kilometers (340 miles) southeast of La Paz, because "police do not have lethal weapons."
Jose Mamani, 45, was killed "while intoxicated, when dynamite strapped to his body exploded, injuring him in the arms, stomach and chest," Perez said.
Community spokesman Rene Arroyo said late Thursday that four others were seriously injured in a clash sparked by Labor Minister Daniel Santalla's official delegation to negotiate for the release of the hostages. Arroyo said four police officers had also been injured and one had been held.
Farmers and mine workers, some armed with explosives, last month forcibly occupied South American Silver's mine project. They are demanding the Bolivian government to expropriate the mine.
Last week, indigenous protesters at the mine captured two Bolivians employed by the company, and earlier this week seized three others as part of their demonstrations.
The Malku Khota project boasts one of the world's largest untapped resources of silver and indium, a rare metal used in flat-screen LCD televisions. South American Silver has invested more than $50 million into the mine since 2007.
Managed by the Canadian firm since 2007, the mine has been the scene of numerous confrontations between miners and native populations in recent months.