Gaza ceasefire holds but mistrust runs deep

GAZA/JERUSALEM (Reuters) - A ceasefire between Israel and Hamas held firm on Thursday with scenes of joy among the ruins in Gaza over what Palestinians hailed as a victory, and both sides saying their fingers were still on the trigger.

In the sudden calm, Palestinians who had been under Israeli bombs for eight days poured into Gaza streets for a celebratory rally, walking past wrecked houses and government buildings.

But as a precaution, schools stayed closed in southern Israel, where nerves were jangled by warning sirens - a false alarm, the army said - after a constant rain of rockets during the most serious Israeli-Palestinian fighting in four years.

Israel had launched its strikes last week with a declared aim of ending rocket attacks on its territory from Gaza, ruled by the Islamist militant group Hamas, which denies Israel's right to exist. Hamas had responded with more rockets.

The truce brokered by Egypt's new Islamist leaders, working with the United States, headed off an Israeli invasion of Gaza.

It was the fruit of intensive diplomacy spurred by U.S. President Barack Obama, who sent his secretary of state to Cairo and backed her up with phone calls to Israeli Prime Minister Benjamin Netanyahu and Egyptian President Mohamed Mursi.

Mursi's role in cajoling his Islamist soulmates in Gaza into the U.S.-backed deal with Israel suggested that Washington can find ways to cooperate with the Muslim Brotherhood leader whom Egyptians elected after toppling former U.S. ally Hosni Mubarak, a bulwark of American policy in the Middle East for 30 years.

Mursi, preoccupied with Egypt's economic crisis, cannot afford to tamper with a 1979 peace treaty with Israel, despite its unpopularity with Egyptians, and needs U.S. financial aid.

MORE DEATHS

Despite the quiet on the battlefield, the death toll from the Gaza conflict crept up on both sides.

The body of Mohammed al-Dalu, 25, was recovered from the rubble of a house where nine of his relatives - four children and five women - were killed by an Israeli bomb this week.

That raised to 163 the number of Palestinians killed, more than half of them civilians, including 37 children, during the Israeli onslaught, according to Gaza medical officials.

Nearly 1,400 rockets struck Israel, killing four civilians and two soldiers, including an officer who died on Thursday of wounds sustained the day before, the Israeli army said.

Israel dropped 1,000 times as much explosive on the Gaza Strip as landed on its soil, Defense Minister Ehud Barak said.

Municipal workers in Gaza began cleaning streets and removing the rubble of bombed buildings. Stores opened and people flocked to markets to buy food.

Jubilant crowds celebrated, with most people waving green Hamas flags but some carrying the yellow emblems of the rival Fatah group, led by Western-backed President Mahmoud Abbas.

That marked a rare show of unity five years after Hamas, which won a Palestinian poll in 2006, forcibly wrested Gaza from Fatah, still dominant in the Israeli-occupied West Bank.

Israel began ferrying tanks northwards, away from the border, on transporters. It plans to discharge gradually tens of thousands of reservists called up for a possible Gaza invasion.

But trust between Israel and Hamas remains in short supply and both said they might well have to fight again.

"The battle with the enemy has not ended yet," Abu Ubaida, spokesman of Hamas's armed wing Izz el-Deen Al-Qassam Brigades, said at an event to mourn its acting military chief Ahmed al-Jaabari, whose killing by Israel on November 14 set off this round.

"HANDS ON TRIGGER"

The exiled leader of Hamas, Khaled Meshaal, said in Cairo his Islamist movement would respect the truce, but warned that if Israel violated it "our hands are on the trigger".

Netanyahu said he had agreed to "exhaust this opportunity for an extended truce", but told Israelis a tougher approach might be required in the future.

Facing a national election in two months, he swiftly came under fire from opposition politicians who had rallied to his side during the fighting but now contend he emerged from the conflict with no real gains for Israel.

"You don't settle with terrorism, you defeat it. And unfortunately, a decisive victory has not been achieved and we did not recharge our deterrence," Shaul Mofaz, leader of the main opposition Kadima party, wrote on his Facebook page.

In a speech, Ismail Haniyeh, Hamas's prime minister in Gaza, urged all Palestinian factions to respect the ceasefire and said his government and security services would monitor compliance.

According to a text of the agreement seen by Reuters, both sides should halt all hostilities, with Israel desisting from incursions and targeting of individuals, while all Palestinian factions should cease rocket fire and cross-border attacks.

The deal also provides for easing Israeli curbs on Gaza's residents, but the two sides disagreed on what this meant.

Israeli sources said Israel would not lift a blockade of the enclave it enforced after Hamas won a Palestinian election in 2006, but Meshaal said the deal covered the opening of all of the territory's border crossings with Israel and Egypt.

Israel let dozens of trucks carry supplies into the Palestinian enclave during the fighting. Residents there have long complained that Israeli restrictions blight their economy.

Barak said Hamas, which declared November 22 a national holiday to mark its "victory", had suffered heavy military blows.

"A large part of the mid-range rockets were destroyed. Hamas managed to hit Israel's built-up areas with around a metric tone of explosives, and Gaza targets got around 1,000 metric tonnes," he said.

He dismissed a ceasefire text published by Hamas, saying: "The right to self-defense trumps any piece of paper."

He appeared to confirm, however, a Hamas claim that the Israelis would no longer enforce a no-go zone on the Gaza side of the frontier that the army says has prevented Hamas raids.

(Additional reporting by Noah Browning in Gaza, Ori Lewis, Crispian Balmer and Dan Williams in Jerusalem; Writing by Jeffrey Heller and Alistair Lyon; Editing by Giles Elgood)

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Afghanistan truck bomb kills two, foreign troops among 70 wounded

KABUL (Reuters) - A suicide truck bomb killed two people and wounded more than 70 in volatile eastern Afghanistan on Friday, officials said, with several foreign troops among those injured.

The Taliban claimed responsibility for the bombing in Maidan Shahr, the provincial capital of Wardak province, 35 km (22 miles) southwest of the capital, Kabul, but it was unclear what the target was.

A spokesman for the NATO-led International Security Assistance Force (ISAF) said fewer than six coalition troops had sustained minor injuries in the bombing close to the provincial governor's office, but gave no further details.

The bomber detonated explosives packed into a water tanker truck about 40 meters from a joint operations centre run by Afghan and coalition troops, Ahmad Wali, a senior police official, told Reuters by telephone.

In a text message sent to journalists, the Taliban claimed responsibility.

The United States has a sizable troop contingent based in Wardak province, where a twin suicide bombing targeting a NATO base killed eight civilians and four Afghan policemen in September.

Wardak saw the worst single incident suffered by foreign forces in the 11-year war when the Taliban shot down a transport helicopter last year, killing 38 troops, 30 of whom were American, mostly elite Navy SEALs.

(Reporting by Hamid Shalizi and Martin Petty; Editing by Nick Macfie)

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Pakistan cuts phones in hope of stopping attacks on Shi'ites

ISLAMABAD (Reuters) - Pakistan is suspending phone coverage in many cities this weekend, an important one in the Shi'ite Muslim calendar, after a series of bomb attacks on Shi'ites triggered by mobile phones.

Hardline Sunnis have threatened more attacks as the Shi'ite mourning month of Muharram comes to a climax. More than a dozen people have already been killed this week attending Muharram processions.

"All the blasts that occurred in the last 15 days were mobile phone-based," Interior Minister Rehman Malik told reporters on Friday.

A suicide bomber killed himself and wounded two police officers near a Shi'ite procession in the northwestern city of Lakki Marwat on Friday.

Intelligence information indicates more attacks have been planned for the coming days in the capital city of Islamabad, Karachi and Quetta. Mobile phone service will be suspended for hours in the three cities and dozens of others over the weekend.

In Karachi, more than 5,000 police are expected to patrol the streets during Muharram events over the next two days, with hundreds more on alert.

"The army is on standby. If any untoward incident occurs, we will call them, if need be," Malik said.

Muharram marks the anniversary of the Battle of Karbala, where the grandson of the Prophet Mohammad and his family members were killed.

Pakistani intelligence officials say extremist groups led by Lashkar-e-Jhangvi have intensified their bombings and shootings of Shi'ites in the hope of triggering conflict that would pave the way for a Sunni theocracy in U.S.-allied Pakistan.

(Reporting by Aisha Chowdhry and Mehreen Zahra-Malik; Writing by Randy Fabi; Editing by Andrew Roche)

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Italy soccer attack stokes fears of neo-fascist violence

ROME (Reuters) - A brutal attack on fans of English football club Tottenham Hotspur in Rome has stoked fears in Italy of rising right-wing and anti-Semitic violence.

Italy's capital has been rattled by increasing militancy by the extreme right since October, with weekly demonstrations by the neo-fascist youth group Blocco Studentesco often ending in clashes with police.

Local media initially blamed Thursday's attack on hard-core fans or 'ultras' supporting Lazio, who Tottenham had traveled to the capital to play in the Europa League.

But two supporters of AS Roma, Lazio's bitter city rivals, were among the 15 detained for alleged involvement in the mass attack on a downtown bar, suggesting a possibly different motivation.

Tottenham have a large contingent of Jewish fans and witnesses told Italian media that masked men armed with knives and baseball bats shouted "Jews, Jews" as they laid siege to a pub where the Tottenham supporters were drinking in a district popular with tourists in an old quarter of Rome.

Ten people were injured in the attack, which left 25-year-old English fan Ashley Mills in a serious condition. He underwent surgery for a severed artery in his leg on Friday and was being monitored by doctors, the Rome hospital where he is being treated said.

Lazio issued a statement on Thursday saying any suggestion that the assailants were Lazio supporters was "totally groundless".

Israeli ambassador to Italy Naor Gilon told reporters the attack on Spurs supporters, stemmed from "a new trend of anti-Semitism in Europe".

The World Jewish Congress called on Friday for Lazio to be suspended from European soccer if they failed to take action against hard core anti-Semitic supporters.

Media reports said Lazio fans chanted "Juden Tottenham, Juden Tottenham" at the match on Thursday.

DANGER TO JEWS

The violence has sparked a row about the safety of Jewish people in Rome.

The head of the city's Jewish community, Ricardo Pacifici, said the attack showed Jews were not sufficiently protected.

Police commissioner Giuseppe Pecoraro rejected the accusation, which he called a provocation.

"The police do more for the Jewish community in Rome than anywhere else in the world," he said.

Rome mayor Gianni Alemanno announced 21 million euros ($27 million) in funding for a Holocaust Museum "to give an immediate response to the many signs of anti-Semitism that have occurred recently in our city".

Alemanno is himself a former neo-fascist youth leader who was greeted with fascist salutes and cries of "Duce! Duce!" - the term adopted by Italy's dictator Benito Mussolini - when he was elected mayor in 2008.

The European far right has gained increased support as the continent's economic crisis has deepened, especially in the debt-laden south. Its most startling rise has been in the worst hit country, Greece, where the anti-immigrant Golden Dawn group has flourished.

Italy is no stranger to the trend.

Last week police arrested four people for allegedly inciting racial hatred through the website of the white supremacist movement Stormfront, confiscating a variety of weapons and neo-Nazi propaganda, after the group published a list of prominent Jewish citizens.

Teenagers carrying neo-fascist flags stormed a high school last month, tossing smoke bombs into classrooms as lessons were being taught, in a raid interpreted in Italy as an attempt by Blocco Studentesco to assert control over its turf.

Shortly afterwards a school due to host a meeting with local authorities about the "neo-fascist resurgence in schools" was daubed with swastikas, Celtic crosses and the word 'Hitler'.

There is no suggestion the Blocco is linked to the attack on the Tottenham supporters.

"We are proud to be fascists," the 18-year old Rome leader of the Blocco recently told Reuters in a suburban cafe, where swastikas had been scrawled across walls and furniture.

The movement venerates 1930s Italian dictator Mussolini but says it does not agree with his racial laws, which stripped Jews of Italian citizenship and barred them from holding government positions in 1938.

RACIST CHANTS

Israeli flags are a common sight among Tottenham supporters at matches, and fans refer to themselves in chants as the 'yid army'.

Lazio have long had fans with extreme right-wing sympathies, notorious for making Nazi salutes, unfurling anti-Semitic banners and chanting racist insults against black players.

At the game on Thursday, which ended in a goalless draw, Lazio supporters unfurled a banner reading 'Free Palestine'.

The English Football Association plans to send a report to European soccer's governing body UEFA following alleged anti-Semitic chanting by Lazio fans during the match on Thursday. Spurs manager Andre Villas-Boas has demanded an investigation.

Lazio was fined 40,000 euros for racist chanting against black players in another match against Tottenham in London in September. ($1 = 0.7761 euros)

(Reporting by Naomi O'Leary; editing by Barry Moody/Mark Meadows)

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Saudi dynasty faces generational choice

RIYADH (Reuters) - Two royal deaths and two cabinet reshuffles in just over a year have edged Saudi Arabia's ruling family toward a tough decision: turning to a new generation after 60 years of rule by sons of the founding patriarch.

The succession beyond King Abdullah - the fifth of Ibn Saud's sons to reign and who is, at 89, recovering from major surgery - is a sensitive subject among the al-Saud dynasty's hundreds of princes; but it will determine the path of the world's top oil exporter and main Arab ally of the United States as it navigates domestic change and regional turmoil.

"In the next 10 years, there will be great changes in terms of the royal family," said Khaled al-Maeena, editor-in-chief of the local English-language newspaper the Saudi Gazette.

"The younger generation will play a role."

Abdullah, not seen in public since an 11-hour back operation last Saturday, has pursued cautious economic and social reforms aimed at reconciling an ultra-conservative Islamic kingdom with the demands of a modern economy and youthful population.

Doctors have said his surgery in Riyadh was successful.

The immediate line of succession is to the crown prince, Prince Salman, born in 1936 and another son of the kingdom's founding monarch, King Abdulaziz, known as Ibn Saud, who died in 1953. But beyond Salman, there is much less clarity.

In October last year, there had appeared still to be a formidable line-up of half-brothers standing beside King Abdullah as heirs to the conservative Islamic state founded by their father in 1932 after decades of tribal warfare.

Yet 13 months later, the deaths of princes Sultan and Nayef, both of whom had been in turn the designated successor as crown prince, as well as the departures of princes Ahmed and Muqrin from senior posts, have left no obvious heir-apparent after Crown Prince Salman, who was promoted after Nayef died in June.

There is debate as to whether Prince Ahmed might remain the principal contender, but some Saudi analysts and foreign diplomats now think it a possibility that after the death of Abdullah the next crown prince will be a grandson of Ibn Saud.

"I think there is no other alternative to the next crown prince being a grandson of King Abdulaziz," said Saudi political scientist Khalid al-Dakhil.

CONSENSUS

In a system built on the idea that consensus ensures stability, and which prizes both seniority and competence, the sprawling al-Saud clan will have to weigh the balance between the family's many different branches.

Saudi analysts see the al-Saud as adept at managing the succession process, something a former Western ambassador to Riyadh said they would be especially anxious to do now at a time of democratic ferment, which has felled republican Arab autocrats and pressured some neighboring monarchs.

"You can bet with the Arab Spring in the background they'll want to take a decision they can all live with and support," he said, speaking on condition of anonymity.

However, the generational leap may prove fraught because Ibn Saud's grandsons - of whom there are hundreds - may fear that if they or their brothers are passed over in favor of cousins, the line of succession will set off down a different branch of the growing family tree, excluding them and their offspring forever.

"It's very difficult to make the jump to the next generation," said Madawi al-Rasheed, a London-based critic of the al-Saud and author of "A History of Saudi Arabia".

"But if there are enough government positions to go around, they can keep them all happy," Rasheed added.

The family might still chose to postpone the generational shift by elevating to the position of official successor Prince Ahmed, who resigned abruptly in November as interior minister after less than five months in the position.

"It doesn't rule Prince Ahmed out of the equation. He's still there," said a Saudi analyst who spoke anonymously. "He's still a choice to become crown prince when Salman becomes king."

Another of Ibn Saud's sons, Prince Muqrin, lost his job as intelligence chief in July and seems less favored, as do other surviving sons of Ibn Saud's several wives and concubines.

Unlike typical European monarchies, there is no automatic succession from father to eldest son. Instead the kingdom's tribal traditions dictate that a new king and senior family members select the heir they consider fittest to lead. The practice of polygamy means they can have a wide choice of sons.

For all the difficulties, little is likely to be heard in public. Any dissent among princes over the succession would only happen in private, said Saudi commentator Jamal Khashoggi.

There may be arguments behind closed doors. But, Khashoggi said: "Then it would be 'Long live the King!' and 'Long live the Crown Prince!'."

GRANDSONS

King Abdullah set up a family "Allegiance Commission" in 2006 which ensures representation for different branches of Ibn Saud's descendants and must approve or reject a new king's choice of heir, if necessary selecting its own candidate.

The commission only comes into effect after Abdullah's death, but analysts said it in some ways only formalized an existing process of seeking consensus on naming a crown prince.

Even if the al-Saud do elect to move down a generation at the next opportunity there is no guarantee that if Salman's heir were to be one of his nephews, he would be a much younger man.

Mecca Governor Prince Khaled al-Faisal, one of the leading candidates among the next-generation princes and viewed as a comparative liberal, was born in 1941, making him older than either of his uncles Prince Ahmed or Prince Muqrin.

The grandson with the biggest job, however, is Prince Mohammed bin Nayef, who replaced Ahmed as interior minister this month. [ID:nL5E8M5CYP] The post not only brings control of the kingdom's formidable security apparatus but formal command over the regional governors, who are all themselves royal princes.

Prince Mohammed was Saudi security chief before becoming minister and earned the plaudits of foreign diplomats and King Abdullah for crushing a domestic al Qaeda wing in recent years. He is seen by local analysts as an astute politician.

At 59, he is roughly a contemporary of his cousins Prince Mohammed bin Fahd, governor of Eastern Province, and Saudi Arabian National Guard commander Prince Miteb bin Abdullah, both also seen as possible future kings.

Other prominent grandsons include Deputy Defence Minister Prince Khaled bin Sultan and Tourism Minister Prince Sultan bin Salman, son of the crown prince and the first Arab in space.

As the ruling dynasty prepares to enter uncharted territory in the years to come, Saudi Arabia's 28 million people will be following closely the health of their rulers and any further shuffling in the responsibilities of Ibn Saud's many heirs.

(Editing by Alastair Macdonald)

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Sweden's rich and poor tussle over tutor tax breaks

STOCKHOLM (Reuters) - A Swedish government plan to offer tax breaks to parents who hire tutors for their children has sparked fresh fears about rising class divisions in the traditionally egalitarian nation.

Though the country is home to the Swedish model of high taxes and generous welfare, data from the OECD club of wealthy nations has shown inequalities rising.

The centre-right government of Prime Minister Fredrik Reinfeldt has over six years chipped away at the social welfare system and rolled out wide tax rebates.

The aim to become one of the few countries to offer tax breaks for families who pay tutors to help their children with homework after school has touched off a new debate.

"Politicians must try to keep the country together. This tears us apart," opposition Social Democrat parliamentarian Hans Olsson told Reuters. "The people who are on benefits and need help, aren't going to be able to use this."

Eva-Lis Siren, chairman of the Swedish teachers' union, is also against the proposal.

"We think it more reasonable that resources should be used in the schools instead of for individual selected students outside of school," she told Reuters.

The government sees the move as a way to boost educational attainment as Sweden has seen its position in global education rankings slide over the past decade.

The Organisation for Economic Cooperation and Development (OECD) reported in a 2009 survey that 15-year-old students in Sweden trailed most of their Nordic neighbors in reading and mathematics, performing only just around the OECD average.

Lena Asplund, a parliamentarian for Reinfeldt's Moderate Party, said other tax rebates had led to an increase of some 9,000 full-time workers each year, and that the long-term figure should almost double.

But OECD figures show Reinfeldt's reforms, as well as earlier changes, some under the Social Democrats, after a 1990s crisis, have given Sweden the steepest increase in inequality over 15 years amongst the 34 members of the organization, with disparities rising at four times the pace of the United States.

($1 = 6.6785 Swedish crowns)

(Reporting by Mia Shanley, editing by Patrick Lannin and Paul Casciato)

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Syria says Turkey's bid for NATO missiles "provocative"

BEIRUT (Reuters) - Syria on Friday condemned Turkey's request for NATO to deploy Patriot defense missiles near their common border, calling it "provocative", after a spate of fighting there that has raised fears of the Syrian civil war embroiling the wider region.

In the first Syrian response to Ankara's request earlier this week, a ministry source told Syrian state television that Damascus would hold Turkey's prime minister responsible for increasing tensions along the frontier.

The 20-month-old uprising against Syrian President Bashar al-Assad has grown increasingly bloody and heavy clashes often erupt right along Syria's northern border with Turkey. Ankara has repeatedly scrambled fighter jets and responded in kind to stray shells flying into its territory.

Turkey's missile request may have riled Damascus and its allies because it could be seen as a first step toward implementing a no-fly zone. Syrian rebels have been requesting one to help them hold territory against a government with overwhelming firepower from the air, but which most foreign governments are loath to impose for fear of getting sucked into the conflict.

The Patriot system is designed to intercept aircraft or missiles. Turkey asked for its deployment after weeks of talks with its NATO allies about how to shore up its 900-km (560 mile) border, where it fears security may deteriorate as the Syrian army steps up fighting against rebel advances.

"Syria stresses its condemnation of the Turkish government's latest provocative step," the ministry source told Syria TV.

The source said that Syria would respect Turkish sovereignty but also said that it "holds (Tayyip) Erdogan responsible for the militarization of the situation on the Syrian-Turkish border and increased tensions".

NATO chief Anders Fogh Rasmussen said on Thursday that the possible deployment of Patriot missiles was "purely defensive" and would "serve as a deterrent to possible enemies even thinking of attacks".

The U.S.-led Western alliance has had some talks on the Turkish request but no decision is expected before next week.

TURKEY REJECTS SYRIAN CRITICISM

Asked about Syria's remarks, Turkish Foreign Minister Ahmet Davutoglu said Damascus was at fault for heightened tensions by having attacked its own people with tanks and warplanes "without any regard for any rules of war".

"There exists such a situation now right next to Turkey, that (Turkey) has to take its own measures...aimed at defense.

"If this measure is not needed then it will not be used, but if there is any kind of risk to Turkey's security, all kinds of steps will be taken, both within Turkey's national capacity and within the framework of Turkey's membership of NATO. Nobody should have a need to question this," Davutoglu added.

Russia, an ally of Assad and Syria's main arms supplier, has opposed the deployment of surface-to-air missiles. It is not a NATO member and cannot block alliance decisions, but planned talks with NATO on Friday about a move it argues "would not foster stability in the region.

Analysts Michael Stephens of the RUSI think-tank in Doha said Turkey's request was a symbolic gesture. He said the Patriot system would do little to stop incoming mortars.

"It could be a first step to a no-fly zone, but what does that take? NATO would need a mandate, which means a United Nations Security Council resolution, and Russia will obviously say no to that," said Stephens.

"This eases the pressure on Erdogan, who may be reluctant to further disrupt the (regional) balance of power. If the missiles are there, it takes the decision out of his hands and puts it on NATO."

DEATH TOLL RISES ABOVE 40,000

With global powers in deadlock over how to defuse Syria's conflict, the number of dead is rising rapidly by the day. The Syrian Observatory for Human Rights said more than 40,000 had died and the number may well be higher because both sides appeared to be under-reporting their casualties.

Erdogan has become a caustic critic of ex-ally Assad but stopped short of serious action to back the insurgents, although he has given them sanctuary on Turkish soil. For its part, Syria has shown few signs of outright aggression towards Turkey.

Rebels appear to have been advancing in recent weeks, seizing several military bases in the eastern Deir al-Zor province, northern Aleppo and even around the capital Damascus.

Their tactics have improved as they focus on controlling roads and choking off military sites. Recent rebel gains in the eastern oil-producing province of Deir al-Zor, including the capture of the Mayadeen artillery base on Thursday, have meant large amounts of weapons and a wider swathe of territory passing into insurgent hands.

But Assad's forces remain in the main city of the province, also called Deir al-Zor, and will be much harder to dislodge.

REBELS STILL LACK FIREPOWER

The insurgents still lack advanced heavy weaponry they need to oust Assad's well-armed troops ensconced in the main cities and remain vulnerable to increasingly frequent air strikes.

Many surface-to-air missiles seized in recent rebel raids appear to be missing some of the equipment needed to fire them, weapons analysts say. This means it is likely the rebels only have the means to fire a few anti-aircraft missiles at a time. Until those capabilities increase, the balance of power may stay the same.

"What you see in Deir al-Zor is a reflection of what is happening everywhere else. The rebels have made big advances in the countryside and even into the main city, but they cannot take it," Stephens said. "This is another brick the rebels have taken down, but it is not critical for toppling the regime."

Deir al-Zor province abuts the long Iraqi border but seizing the frontier may not offer the same advantages seen by rebels near the northern border with Turkey, where the fighters can go in and out easily.

Iraqis are slipping in to fight on both sides. Their loyalties are likely fall along the sectarian lines that have increasingly come to define the Syrian conflict.

Iraq's majority Shi'ite Muslims largely support Assad, whose Alawite minority, derived from Shi'ite Islam, has dominated the country since the president's late father seized power 42 years ago. Sunni Muslims in Iraq generally support the revolt, which is spearheaded by Syria's Sunni majority.

Assad met in Damascus on Friday with Ali Larijani, the parliament speaker of Iran, another major ally of Damascus, and said he was pursuing national dialogue at the same time that his forces were "fighting terrorism", which he said threatens to erode Syria's security as well as regional stability.

(Additional reporting by Oliver Holmes in Beirut and Jonathon Burch in Ankara; Editing by Mark Heinrich)

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Protests after "pharaoh" Mursi assumes powers in Egypt

CAIRO (Reuters) - Egyptian President Mohamed Mursi's decision to assume sweeping powers caused fury amongst his opponents and prompted violent clashes in central Cairo and other cities on Friday.

Police fired tear gas near Cairo's Tahrir Square, heart of the 2011 uprising that toppled Hosni Mubarak, where thousands demanded Mursi quit and accused him of launching a "coup". There were violent protests in Alexandria, Port Said and Suez.

Opponents accused Mursi, who has issued a decree that puts his decisions above legal challenge until a new parliament is elected, of being the new Mubarak and hijacking the revolution.

"The people want to bring down the regime," shouted protesters in Tahrir, echoing a chant used in the uprising that forced Mubarak to step down. "Get out, Mursi," they chanted, along with "Mubarak tell Mursi, jail comes after the throne."

Mursi's aides said the presidential decree was intended to speed up a protracted transition that has been hindered by legal obstacles but Mursi's rivals condemned him as an autocratic pharaoh who wanted to impose his Islamist vision on Egypt.

"I am for all Egyptians. I will not be biased against any son of Egypt," Mursi said on a stage outside the presidential palace, adding that he was working for social and economic stability and the rotation of power.

"Opposition in Egypt does not worry me, but it has to be real and strong," he said, seeking to placate his critics and telling Egyptians that he was committed to the revolution. "Go forward, always forward ... to a new Egypt."

Buoyed by accolades from around the world for mediating a truce between Hamas and Israel in the Gaza Strip, Mursi on Thursday ordered that an Islamist-dominated assembly writing the new constitution could not be dissolved by legal challenges.

"Mursi a 'temporary' dictator," was the headline in the independent daily Al-Masry Al-Youm.

Mursi, an Islamist whose roots are in the Muslim Brotherhood, also gave himself wide powers that allowed him to sack the unpopular general prosecutor and opened the door for a retrial for Mubarak and his aides.

The president's decree aimed to end the logjam and push Egypt, the Arab world's most populous nation, more quickly along its democratic path, the presidential spokesman said.

"President Mursi said we must go out of the bottleneck without breaking the bottle," Yasser Ali told Reuters.

TURBULENCE AND TURMOIL

The president's decree said any decrees he issued while no parliament sat could not be challenged, moves that consolidated his power but look set to polarize Egypt further, threatening more turbulence in a nation at the heart of the Arab Spring.

The turmoil has weighed heavily on Egypt's faltering economy that was thrown a lifeline this week when a preliminary deal was reached with the International Monetary Fund for a $4.8 billion loan. But it also means unpopular economic measures.

In Alexandria, north of Cairo, protesters ransacked an office of the Brotherhood's political party, burning books and chairs in the street. Supporters of Mursi and opponents clashed elsewhere in the city, leaving 12 injured.

A party building was also attacked by stone-throwing protesters in Port Said, and demonstrators in Suez threw petrol bombs that burned banners outside the party building.

Mursi's decree is bound to worry Western allies, particularly the United States, a generous benefactor to Egypt's army, which praised Egypt for its part in bringing Israelis and Palestinians to a ceasefire on Wednesday.

The West may become concerned about measures that, for example, undermine judicial independence. The European Union urged Mursi to respect the democratic process.

"We are very concerned about the possible huge ramifications of this declaration on human rights and the rule of law in Egypt," Rupert Colville, spokesman for the U.N. Human Rights Commissioner Navi Pillay, said at the United Nations in Geneva.

The United States has been concerned about the fate of what was once a close ally under Mubarak, who preserved Egypt's 1979 peace treaty with Israel. The Gaza deal has reassured Washington but the deepening polarization of the nation will be a worry.

"ANOTHER DICTATOR"

"The decree is basically a coup on state institutions and the rule of law that is likely to undermine the revolution and the transition to democracy," said Mervat Ahmed, an independent activist in Tahrir protesting against the decree. "I worry Mursi will be another dictator like the one before him."

Leading liberal Mohamed ElBaradei, who joined other politicians on Thursday night to demand the decree was withdrawn, wrote on his Twitter account that Mursi had "usurped all state powers and appointed himself Egypt's new pharaoh".

Almost two years after Mubarak was toppled and about five months since Mursi took office, propelled to the post by the Muslim Brotherhood, Egypt has no permanent constitution, which must be in place before new parliamentary elections are held.

The last parliament, which sat for the first time earlier this year, was dissolved after a court declared it void. It was dominated by the Brotherhood's political party.

An assembly drawing up the constitution has yet to complete its work. Many liberals, Christians and others have walked out accusing the Islamists who dominate it of ignoring their voices over the extent that Islam should be enshrined in the new state.

Opponents call for the assembly to be scrapped and remade. Mursi's decree protects the existing one and extends the deadline for drafting a document by two months, pushing it back to February, further delaying a new parliamentary election.

Explaining the rationale behind the moves, the presidential spokesman said: "This means ending the period of constitutional instability to arrive at a state with a written constitution, an elected president and parliament."

"THIS IS NOT THE REMEDY"

Analyst Seif El Din Abdel Fatah said the decree targeted the judiciary which had reversed, for example, an earlier Mursi decision to remove the prosecutor.

Mursi, who is now protected by his new decree from judicial reversals, said the judiciary contained honorable men but said he would uncover corrupt elements. He also said he would ensure independence for the judicial, executive and legislative powers.

Although many of Mursi's opponents also opposed the sacked prosecutor, whom they blamed for shortcomings in prosecuting Mubarak and his aides, and also want judicial reform, they say a draconian presidential decree was not the way to do it.

"There was a disease but this is not the remedy," said Hassan Nafaa, a liberal-minded political science professor and activist at Cairo University.

(Additional reporting by Tom Miles in Geneva and Sebastian Moffett in Brussels; Writing by Edmund Blair; Editing by Peter Millership and Giles Elgood)

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Ireland opens new probe into death of woman denied abortion

DUBLIN (Reuters) - Ireland has opened a new investigation into the death of a woman denied an abortion of her dying fetus, as the government scrambled to stem criticism of its handling of an incident that polarized the overwhelmingly Catholic country.

Savita Halappanavar, a 31-year old dentist, was admitted to hospital in severe pain on October 21 and asked for a termination after doctors said her baby would not survive, according to husband Praveen, but in a country with some of the world's most restrictive abortion laws, surgeons would not remove the fetus until its heartbeat stopped days later.

Husband Praveen Halappanavar, who believes the delay contributed to the blood poisoning that killed his wife on October 28, has said he would not cooperate with an investigation already launched by the country's health service because he did not believe it would be neutral.

On Friday, the Health Information and Quality Authority (HIQA) watchdog, which is government-funded but independent of the state health service, said it had also launched an investigation after receiving information from the health service and University Hospital Galway, where Halappanavar died.

A solicitor acting on behalf of the husband said the new inquiry was unlikely to be enough to satisfy his client.

"My client has always made his position very clear ... He wants a public inquiry. He has made it clear he wants to get to the truth of the matter, so I don't think that the framework of HIQA will suffice," Gerard O'Donnell, told RTE radio.

He added that the next step would be to consider an application to the European Court of Human Rights, which criticized Ireland's abortion ban in 2010.

Halappanavar's death has reopened a decades-long debate over whether the government should legislate to explicitly allow abortion when the life of the mother is at risk.

Irish law does not specify exactly when the threat to the life of the mother is high enough to justify a termination, leaving doctors to decide. Critics say this means doctors' personal beliefs can play a role.

Though the influence of the Catholic Church over Irish politics has waned since the 1980s, successive governments have been loath to legislate on an issue they fear could alienate conservative voters.

CALL TO CLARIFY

Ireland's abortion stance is enshrined in a 1983 constitutional amendment that intended to ban abortion in all circumstances. In 1992, when challenged in the "X-case" involving a 14-year-old rape victim, the Supreme Court ruled that abortion was permitted when the woman's life was at risk, including from suicide.

But successive governments refused to make clear the circumstances under which a threat would make an abortion legal. After several challenges, the European Court of Human Rights ruled in 2010 that Ireland must clarify its position.

Prime Minister Enda Kenny, whose ruling Fine Gael party made an election pledge not to introduce new laws allowing abortion, said last week he would not be rushed into a decision on the issue.

The government was forced into an embarrassing u-turn this week when it removed three Galway-based consultants from the health service inquiry following criticism from Praveen Halappanavar.

The issue has raised tensions between Fine Gael and the more socially liberal Labour Party, its junior coalition partner, which has campaigned for a clarification of the country's abortion rules.

The country's president, Michael D. Higgins, a former member of the Labour Party, weighed into the debate this week when he said an investigation was needed that satisfied the dead woman's family.

Opposition party Sinn Fein introduced a motion to parliament on Wednesday calling for parliament to legislate on abortion, but it was rejected.

"Successive governments over the past 20 years have failed in respect of legislation. That failure is in large measure due to fear or cowardice," said Mary Lou McDonald, vice president of Sinn Fein.

(Editing by Will Waterman)

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Former Russian Defence Ministry official charged with fraud

MOSCOW (Reuters) - A former bureaucrat was charged with fraud on Friday in a $100 million embezzlement case that has cost the defense minister his job and shone a spotlight on corruption in President Vladimir Putin's administration.

Yevgeniya Vasilyeva, who had valuable paintings, rare antiques and more than 100 expensive rings seized in an early morning raid on her central Moscow apartment last month, was charged with large-scale fraud.

Vasilyeva, 33, oversaw defense ministry property at a time when one of its firms allegedly sold lucrative properties to insider companies at a loss of at least 3 billion roubles ($96 million).

"Vasilyeva, along with others, participated in the embezzlement of property of subsidiaries of the holding Oboronservis," said federal Investigative Committee spokesman Vladimir Markin.

Vasilyeva, who was photographed in a silver sequined dress with former Defence Minister Anatoly Serdyukov, was put under house arrest by a Moscow court and made to wear a tracking device.

Though he has not come under investigation himself, Putin fired Serdyukov on November 6, shortly after the start of the probe. Putin won a third term in office in March.

Vasilyeva has not spoken publicly about the allegations. Serdyukov said in a statement last month that any comments on the case represented only "a possible scenario."

Analysts say Serdyukov fell foul of influential groups within the Kremlin and had crossed his powerful father-in-law.

Investigators said that on Thursday they had raided 18 cottages in a community outside Moscow which belonged to Russia's national tax service and where Serdyukov - a former tax service chief - had stayed for some time.

RIA reported two others have been arrested in the investigation.

Russia's Defence Ministry channels billions of dollars every year through the country's arms industry, the world's second-largest defense exporter.

A military prosecutor last year said one fifth of the military budget is stolen. ($1 = 31.1672 Russian roubles)

(Reporting By Thomas Grove; editing by Jason Webb)

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Iran ready to sharply increase nuclear work in bunker: IAEA

VIENNA (Reuters) - Iran is ready to sharply expand its uranium enrichment in an underground site after installing all the centrifuges it was built for, a U.N. nuclear report showed on Friday, a development likely to fuel Western alarm over Tehran's nuclear aims.

The Islamic state has put in place nearly 2,800 centrifuges that the Fordow enrichment site, buried deep inside a mountain, was designed for and could soon double the number of them operating to almost 1,400, according to the confidential International Atomic Energy Agency report obtained by Reuters.

Tehran has produced about 233 kg (512 pounds) of higher-grade enriched uranium since 2010, an increase of 43 kg since August this year, according to the report issued in Vienna.

The Iranians have used 96 kg of the uranium refined to 20 percent of fissile purity for conversion into fuel for its medical research reactor in Tehran, the report said.

Such conversions make it harder for the material to be processed into 90 percent, or bomb-grade, enriched uranium and could be a step by Tehran meant in part to counter Western suspicions of a covert atomic bomb program.

But the IAEA report also said that "extensive activities" at the Parchin military compound - an allusion to suspected Iranian attempts to remove evidence - would seriously undermine an agency investigation into indications that research relevant to developing a nuclear explosive were conducted there.

The IAEA delivered its latest quarterly Iran report 10 days after U.S. President Barack Obama's re-election raised hopes of a revival of nuclear diplomacy with Iran following speculation that Israel might bomb Iranian nuclear facilities.

"WINDOW OF TIME" FOR DIPLOMACY?

Tehran denies U.S. and Israeli allegations that it is seeking a nuclear weapons capability, saying its program is entirely for peaceful energy. But U.N. inspectors suspect past, and possibly ongoing, military-related nuclear activity.

Obama this week said he believed there was still a "window of time" to find a peaceful resolution to the long standoff with Iran. But the IAEA report underlined the tough task facing Western powers pressing it to curb its nuclear program.

Fordow particularly worries the West as it is where Iran refines uranium to a fissile concentration of 20 percent.

Iran says it needs to do this to make fuel for the Tehran research reactor, but it also represents the major technical leap towards the level needed for nuclear weapons.

The fact that Fordow is buried deep underground also makes it less vulnerable to any air strikes, which Israel has threatened if diplomacy fails to stop Iran acquiring the means to produce nuclear weapons.

The conversion of 20 percent uranium into fuel is reversible as long as it has not been introduced into a working reactor, but it would take a few months to turn it back into gas form.

This may explain why Israel, assumed to be the Middle East's only nuclear-armed state, recently signaled that an attack on its arch-enemy's nuclear sites was not imminent, after months of talk that it might be on the cards soon.

The question of when and how quickly Iran might be able to assemble an atom bomb if it chose to do so is hotly debated because it could influence any decision by Israel to take military action - a step many fear would blow up into a broader Middle East war that would batter a stumbling global economy.

(Editing by Mark Heinrich)

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UK needs details before any recognition of Syria opposition

LONDON (Reuters) - Britain needs more details from the fledgling Syria opposition coalition before it can formally recognize the group, British Foreign Secretary William Hague said on Friday ahead of talks with Syrian opposition officials.

The coalition was formed in Doha on Sunday in an attempt to unify Syria's opposition groups and boost their chances of securing international recognition and arms.

France on Tuesday became the first European power to recognize the group, led by moderate Sunni Muslim cleric Mouaz Alkhatib, who with other Syrian opposition officials is expected to meet Hague in London later on Friday.

"We would like to be able to be in a position to recognize them as the sole legitimate representatives of the Syrian people, but I do want to hear more about their plans," Hague told BBC radio, "About who they are going to appoint, particular positions, about whether the Kurds will be included, how much support they have inside Syria."

He said he might be able to make a decision on whether to recognize the group "in the coming days".

French President Francois Hollande will meet Syrian opposition officials in Paris on Saturday. The French foreign minister said on Thursday that France would in the coming weeks discuss supplying arms to Syrian opposition forces.

Hague told the BBC that Britain's National Security Council, which met on Thursday, had discussed giving military aid to the Syrian opposition, but that Britain had not changed its position and would continue to supply only non-lethal assistance.

(Reporting by Mohammed Abbas and Alessandra Prentice; Editing by Alison Williams and Robert Woodward)

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China's commerce minister voted out in rare congress snub: sources

BEIJING (Reuters) - China's commerce minister was surprisingly blocked from a spot on the ruling Communist Party's elite body during a conclave this week, sources said, a rare snub for an official that could raise questions about trade policies during his tenure.

The failure of Chen Deming to secure a seat on the 25-member Politburo marks one of the few surprises to emerge from the party's five-yearly congress that wrapped this week with the anointing of a new slate of top leaders who will run the world's second largest economy.

It is also the first time in more than two decades that an official designated for a Politburo spot has been voted out of the party's 205-member Central Committee in elections. Central Committee membership is a prerequisite for a Politburo seat.

"Chen Deming was voted out during multi-candidate elections to the Central Committee," one source told Reuters. State news agency Xinhua said there were eight percent more candidates than seats in a preliminary vote before the formal election on Wednesday.

Not being name as an alternate or full member during the party's 18th congress means Chen, who was previously an alternate member, is almost certain to step down as commerce minister next March. Party regulations require cabinet ministers to be Central Committee members.

It is unclear why Chen, who was seen as a strong candidate for a vice premiership and at 63 is young enough to serve another five-year term under party rules, did not secure the votes for a seat on the Central Committee.

Tianjin Mayor Huang Xingguo, 58, who was elected a full member of the Central Committee, is front-runner to replace Chen as commerce minister, two sources with ties to the leadership said.

Ma Kai, 66, secretary general of the State Council, or cabinet, is tipped to become a vice premier now that Chen is out of the running, the sources said, requesting anonymity to avoid repercussions for discussing secretive elite politics.

Until now, a politician designated to become a Politburo member has not been barred from the Central Committee since 1987, when Deng Liqun, an ultra-conservative and reviled Marxist ideologue, was voted out at the 13th congress in a deeply embarrassing fall from grace.

Chen's imminent retirement as commerce minister, a post he has held since taking over from now disgraced politician Bo Xilai in late 2007, would come as China faces growing tension with major trade partners in Europe and the United States and Chinese officials warn of increasing protectionism.

China's leaders set a goal for 10 percent export growth this year, but it is more likely to come in at around 7 percent as the world has struggled to recover from financial crisis.

DEFENDED RECORD

Some experts suggest that Chen's age was the main factor in his ouster.

"Minister Chen didn't get onto the Central Committee because of his age. He was born in 1949 and that makes him too old to serve a full term," said a Commerce Ministry official who declined to be identified.

But exceptions to the mandatory retirement age of 65 are often made for cabinet ministers and provincial governors and politicians can become a vice premier before they turn 68.

Du Qinglin, 66, a vice chairman to parliament's advisory body, was just elected to the Central Committee.

At a news conference last week on the sidelines of the congress, Chen declined to answer questions about whether he was being considered for a vice premier post, but he defended the ministry's record at the World Trade Organisation.

"When you consider the volume of trade cases in which China is involved, we've won quite a few," Chen said. "But we haven't bragged about our wins, whereas some of our foreign colleagues have trumpeted theirs."

Analysts said Chen had a reputation as a competent and moderate minister, suggesting his performance may not have been at the center of his failure to secure a central committee seat, and despite the questions that are bound to arise, policy would probably not change.

"China's overall trade policy is not set by the ministry, but by the central government," said He Weiwen, director of the China-U.S. Trade Research Centre at the University of International Business and Economics in Beijing.

Under Chen, the ministry has increased its use of WTO legal processes, in part to gain experience. China has a relatively short history of participating in multilateral institutions and while it has lost most of WTO cases filed against it, most countries defending against complaints have the same problem.

Scott Kennedy, director of the Research Centre for Chinese Politics and Business at Indiana University said Chen's departure from the Central Committee was puzzling and political motives could be at play.

"I don't think he could be punished for his record as minister of commerce. I think overall he's done a pretty decent job with the hand he has been dealt," Kennedy said.

(Additional reporting by Lucy Hornby and Nick Edwards; Editing by Robert Birsel)

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Amid tempered hopes, Colombia, FARC set for talks in Cuba

HAVANA (Reuters) - Amid hopes tempered by a history of failure, Colombia and the Marxist FARC rebels begin talks in Cuba on Monday in the latest bid to end their bloody, half-century-old conflict.

Tens of thousands of lives have been lost and millions of people displaced in the bitter war the two sides failed to resolve in three past peace attempts, the last ending in 2002.

The negotiations were scheduled to begin on Thursday but were postponed due to "technical" details.

President Juan Manuel Santos, who secretly initiated the peace process almost two years ago, has said there is reason for "moderate optimism" but officials also have warned against unrealistic expectations.

In a recent Gallup poll, 72 percent of Colombians supported the negotiations but only 39 percent thought they would succeed.

The Colombian government and the FARC, or Revolutionary Armed Forces of Colombia, will negotiate five points including rural development, an end to the war, the drug trade, the rebels' future and compensation of victims of the conflict.

Despite past failures, analysts say hopes this time are based on signs of greater flexibility on both sides and a shared need to stop the fighting.

The FARC has been battered by a 10-year-long U.S.-backed military offensive that has halved its ranks to an estimated 8,000 rebels and pushed them deeper into the mountains and jungles that have given refuge since the group formed in 1964.

But it still packs enough punch to continue fighting for years, which threatens the government's plan to open more of the country's remote areas to oil and mining operations that are boosting the economy in the country of 46 million people.

"It's not quite a stalemate, but it feels like it because the likelihood you'd have to keep fighting is high and the cost of that may be greater than the cost of talks," said Adam Isaacson at the Washington Office on Latin America research group.

LAST, BEST CHANCE

He said a weakened FARC may feel this is "their last, best chance to negotiate, that their trajectory is downward."

The last peace talks, held in a tent in the Colombian jungle, turned into a media circus, so both sides have agreed to limit press contacts, a likely reason they are meeting in an undisclosed location in tightly controlled Cuba.

The talks officially began last month in a largely ceremonial meeting in Norway, which has worked behind the scenes with Cuba to set up the negotiations and, along with the Communist island, will serve as a guarantor for the process. Venezuela and Chile will have representatives at the talks.

Santos, who may seek re-election in 2014, wants the process done in nine months but the rebels say peace cannot be hurried.

"These are issues that can't be dealt with in a short time ... above all the social situation in which the people live. There is much poverty in Colombia," FARC lead negotiator Ivan Marquez said in an interview on pro-rebel website www.anncol.eu.

In Norway, he called for ousting foreign companies fueling Colombia's oil and mining boom but his counterpart, Humberto de la Calle, said the talks must stick to the agreed upon topics, the first of which will be rural development.

Numerous potential stumbling blocks await the negotiators, including land reform, decisions on which FARC leaders will be allowed to participate in politics, who must go to jail for the group's crimes and FARC involvement in the drug trade.

In its 48 years of existence, the FARC has transformed from a communist agrarian movement into an organization that deals in cocaine, kidnapping and extortion to sustain itself.

Its leaders deny involvement in the drug trade and declared in February they would no longer kidnap for ransom, but the United States and European Union consider the FARC to be a terrorist organization.

The rebels said they will request a ceasefire at the start of talks, which Santos already has rejected.

(Reporting By David Adams; Editing by Bill Trott)

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Italy's Berlusconi says Monti's policy "disastrous"

ROME (Reuters) - Former Italian prime minister Silvio Berlusconi called on Friday for a change in economic policy after what he called a "disastrous" year of austerity under the technocratic government of Mario Monti.

The 76 year-old billionaire's latest attack adds to a series of often contradictory comments he has made in recent weeks that have deepened the political uncertainty before the next election, which is expected to be held in April next year.

Berlusconi's centre-right People of Freedom (PDL) party is expected to choose its candidate to run for prime minister after a primary on December 16. It has been deeply divided over whether or not to stick with Monti's economic program.

"The data after a year of technocratic government is disastrous and so I think there absolutely has to be a change in this economic policy imposed on us by Europe and above all by the hegemony of Germany," Berlusconi told reporters.

A series of protests in recent weeks have underlined public discontent with the tax hikes and spending cuts imposed by Monti to try to stabilize Italy's strained public finances.

Although many business leaders would like to see the former European Commissioner lead another government, 62 percent of Italians are against a Monti encore, while 22 percent are for it, according to an SWG poll for state-owned TV network RAI.

Monti's approval rating has halved to 36 percent, SWG said, compared with 71 percent when he took over 12 months ago. However his ratings are still higher than any of the main political party leaders.

At least for the moment, Berlusconi is not expected to run in the election although he has had several changes of mind that have spread confusion and disarray in his centre-right camp, especially among moderates who want to stick broadly with Monti's agenda.

ELECTION DATE

Uncertainty has also increased following a stand-off between the PDL and Monti's government over the date for local elections in Lazio and Lombardy, two regions where centre-right governments were driven out by corruption scandals.

Interior Minister Annamaria Cancellieri wants the elections to be held on February 10 but PDL leaders, concerned about the impact of the regional vote, say it should be held on the same day as the national election expected in April.

A number of centre-right leaders have suggested the PDL should withdraw support for Monti if the local polls are not delayed, bringing down the government and forcing an election before April.

In a comment posted on his Facebook page, Berlusconi said a single election date would be preferable and added that one could be decided after a meeting on Friday evening between the speakers of the lower house and Senate with President Giorgio Napoletano.

The PDL, which backs Monti in parliament under a cross-party agreement with the centre-left Democratic Party, is trailing in the opinion polls is not expected to form the next government.

Berlusconi was forced to step down a year ago after a financial market crisis threatened to destabilize Italy's public debt, which now amounts to just under 2 trillion euros, or over 125 percent of gross domestic product.

He has only recently begun talking in public about politics after several months of silence.

He said on Friday that regional election results last month, which saw a surge in support for the anti-establishment 5-Star Movement of comedian Beppe Grillo, a relentless Monti critic, proved more than two thirds of Italians wanted a change.

(Additional reporting by Steve Scherer; Writing by James Mackenzie; Editing by Louise Ireland and Greg Mahlich)

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Analysis: Jordan's king pinched by absence of Gulf aid

LONDON (Reuters) - With protesters baying for his overthrow, Jordan's King Abdullah might be wondering why his fellow-dynasts in Gulf Arab states are not providing the cash that could calm the trouble.

After days of demonstrations against fuel price rises in provincial towns, Muslim Brotherhood supporters joined crowds in Amman on Friday in a rare focus of anger on the king.

"The people want the downfall of the regime", about 3,000 people chanted, in an ominous signal to a U.S.-backed monarchy accustomed to juggling internal rifts between its tribal East Bank and Palestinian citizens, as well as rivalries among its stronger neighbors Syria, Iraq, Saudi Arabia and Israel.

Exposed to the bloody upheaval in Syria, dependent on Iraq for its oil supplies and on Saudi Arabia for funds, Jordan, with its majority Palestinian population, is also sensitive to actions by Israel, which is now bombing Hamas-ruled Gaza.

Instability in Jordan, one of only two Arab countries to sign a peace treaty with Israel, would be alarming for its Western patrons and its conservative Gulf Arab allies.

"Gulf countries must be very worried about any signs of the collapse of the Jordanian monarchy, which would be the first one to fall in the Arab Spring context," said Valerie Yorke, a London-based expert on Jordan.

The kingdom has long relied on Western support and intermittent dollops of Gulf financial aid to survive.

But Saudi Arabia, Amman's main donor, is not known to have provided money since a $1.4 billion infusion in late 2011 to stave off a previous dire economic crisis in the kingdom.

What makes this puzzling is that last year the Saudis had seemed to be trying to draw Jordan into a closer embrace.

In May 2011, the six-nation Gulf Cooperation Council (GCC) accepted Jordan's application to join, after snubbing it for 15 years, in what was seen as a gesture of monarchical solidarity in face of a wave of popular revolts sweeping the Arab world.

The Saudi-led GCC, which also invited distant Morocco to join, may have wanted Jordanian and Moroccan security help in damping unrest in its own backyard, especially Bahrain, where Saudi and other Gulf troops helped the Sunni Muslim king crush Shi'ite-led pro-democracy protests in March 2011.

Saudi Arabia, eager to counter the influence of Shi'ite heavyweight Iran, was also looking to reorder its alliances after the shock of seeing its longtime Egyptian partner, Hosni Mubarak, overthrown with no U.S. effort to save him.

PROMISES OF REFORM

For now, Jordan is grappling alone with a budget shortfall that prompted Tuesday's fuel subsidy cuts, which the IMF demanded among its conditions for a proposed $2 billion loan.

Anger over the price rises ignited protests similar to those in 1989 when the late King Hussein responded with a political opening that led to a remarkably free election and made Muslim Brotherhood-linked Islamists the biggest bloc in parliament.

Since then, electoral rules have been revised to produce a succession of tame assemblies dominated by the monarchy's tribal, East Bank power base. Political reform projects launched by King Abdullah since he took power in 1999 have faltered.

Gulf Arab rulers, who permit few if any constitutional limits on their own power, might not look kindly on any major political reform or greater freedom of expression in Jordan.

King Abdullah accepted constitutional changes in August that devolved some of his powers to parliament and paved the way for a prime minister chosen by the assembly rather than by him.

But for all his reform talk, there has been no big overhaul of the electoral law to govern an election in January, which the Muslim Brotherhood plans to boycott in protest at perceived discrimination against its mainly urban and Palestinian base.

Liberals and Islamists have long pushed for peaceful change, not revolution, in Jordan, but the latest unrest has spawned slogans that echo those aimed at other Arab rulers seen by some of their people as corrupt, oppressive puppets of the West.

It also reflects the wrath of East Bankers who fear the king might enact reforms at their expense and who resent austerity measures that reduce the patronage, state jobs and other perks that have come their way from the palace in the past.

Rhetorically, the West backs democratic reform, but it also values a monarchy that has long kept Jordan stable in a volatile region, where it provides a buffer on Israel's eastern border.

The United States and its allies are having to come to terms with new realities in Arab republics like Tunisia and Egypt, where Islamists won elections after autocrats were overthrown.

Arab monarchies have survived so far, but their future poses a familiar dilemma for the West, whose desire for reliable allies in the Middle East has frequently outweighed concern for democracy or human rights, as in oil giant Saudi Arabia and in troubled Bahrain, which hosts the U.S. Fifth Fleet.

"The West supported stability rather than change in the region, and in Jordan, over the past 30 or 40 years and paid for it - financially at the time, politically now," Yorke said.

Saudi Arabia and its Gulf allies have helped keep Jordan afloat financially in recent years and the absence of their petrodollars now is keenly felt in a kingdom under stress.

(Additional reporting by Suleiman al-Khalidi in Amman; Editing by Giles Elgood)

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Iraqi forces clash with Kurdish troops, one dead

BAGHDAD (Reuters) - One person died in clashes between Iraqi forces and troops guarding an office of a Kurdish political party on Friday, deepening tension between the oil-rich region and the central government in Baghdad.

The fighting in Tuz Khurmato, 170 km (105 miles) north of Iraq's capital, highlights strains between the federal government and the Kurdish leadership over autonomy, oil and land that risk upsetting Iraq's uneasy union.

The departure of U.S. forces from the area in December removed a buffer between the two sides. The tension grew further after Iraq's Shi'ite Prime Minister Nuri al-Maliki formed a new security command covering the disputed city of Kirkuk.

Kurdish officials took his move as a provocation.

Iraqi police officials said the first shot on Friday was fired by the Kurdish Peshmerga military forces at the local headquarters of the Patriotic Union of Kurdistan (PUK) in Tuz Khurmatu.

The city lies in a border area over which both sides claim jurisdiction.

"The army and police had an order to search a building belonging to the Patriotic Union of Kurdistan ... and when the troops entered, the guards opened fire on them," said Iraqi Lieutenant Colonel Emad al-Bayati, who said he was at the scene.

Four policemen, a soldier and several guards were wounded, Bayati said.

Police and officials said the situation was now under control, but witnesses said the armed stand-off was continuing.

(Reporting by Mustafa Mahmoud in Kirkuk, Ghazwan Hassan in Tikrit; Writing by Suadad al-Salhy; Editing by Isabel Coles and Tom Pfeiffer)

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Putin, Merkel try to ease frosty Germany-Russia ties

MOSCOW (Reuters) - Russian President Vladimir Putin dismissed German criticism of his human rights record on Friday as Chancellor Angela Merkel began a visit to Moscow with a chill descending on relations between the two big European powers.

Merkel and Putin sat together at a conference before going in to talks at which German lawmakers had asked her to press the Kremlin leader over what they see as a crackdown on dissent since he began a six-year third term in May.

They at first looked uncomfortable but appeared to relax and occasionally laughed during questions from business leaders on issues ranging from strong business ties to Russia's jailing of members of the Pussy Riot punk band over a church protest.

Both made clear they wanted to avoid any impression of friction that might undermine a business relationship worth more than $80 billion a year in annual trade.

"We want Russia to succeed," Merkel said. "We have our own ideas on how one can succeed. Our ideas don't always coincide, but what matters is that we listen to each other."

She said Germany needs Russia for raw materials such as gas and oil, while Russia needs Germany to help in modernization, infrastructure and health care.

Putin, sitting close to Merkel in the glittering Alexander Hall of the Grand Kremlin Palace, said Russia was listening to its critics but made politely clear that they did not fully understand events in Russia.

"As for political and ideological issues, we hear our partners. But they hear about what's happening from very far away," he said.

He accused one of the Pussy Riot members of taking part in an anti-Semitic protest while part of another radical movement, although the group denies his interpretation of the protest.

Going on the offensive, he shrugged off criticism of a lack of freedom of information in Russia and said five German states had no laws guaranteeing such freedoms.

With a touch of irony, he added: "On there being no German who would be a model to us, there is such a German - that is the Federal Chancellor."

The two leaders then headed into private talks in the Kremlin that were likely to be frosty after the Bundestag agreed a resolution last week expressing alarm over the threat to civil society in Russia posed by Putin's return to the presidency.

Putin's spokesman denounced a rise in "anti-Russian rhetoric" in Germany before the talks but Putin said the size of bilateral trade made a mockery of talk of a chill in relations.

"Some disagreements might take place, yes. We argue, search for compromises. But there is certainly no gloomy atmosphere," the Kremlin leader said.

STRONG BUSINESS RELATIONSHIP

Despite their political differences, Germany and Russia have managed to keep business ties on track since the fall of the Soviet Union in 1991 and Germany receives 40 percent of its gas and 30 percent of its oil from Russia.

Berlin hopes to avoid any disagreement that might provoke Moscow into retaliating by reducing energy supplies to Europe, as has happened before during Russian price disputes with its neighbor Ukraine.

The European Union has already challenged the pricing policy of state energy export monopoly Gazprom, and opened an investigation into whether this policy is fair.

But concerns about human rights and democracy in Russia have grown in the West since Putin returned to the presidency, facing the biggest protests since he first rose to power in 2000.

Russian parliament, dominated by his party, has pushed a series of laws since May which critics say are intended to stifle dissent, including legislation that went into force on Wednesday broadening the definition of treason.

The West also condemned Putin over the jailing of two members of Pussy Riot after their irreverent protest against him in Moscow's main Russian Orthodox cathedral, although the German town of Wittenberg was criticized for nominating the group for a freedom of speech prize in October.

Putin, a German speaker who spent five years in Dresden for the KGB, has never had as strong a relationship with Merkel as with her predecessor, Gerhard Schroeder.

But despite their uneasy relationship, deals to be clinched during the visit included Russian Railways signing a letter of intent to buy nearly 700 locomotives from Germany's Siemens for about 2.5 billion euros ($3.2 billion), sources said.

(Additional reporting by Darya Korsunskaya, Noah Barkin, Maria Sheahan and Jens Hack, Writing by Timothy Heritage; Editing by Jon Boyle)

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Portugal ruling party support falls after tax hikes

LISBON (Reuters) - Support for Portugal's ruling Social Democrats fell further behind the opposition Socialists after the center-right government unveiled the largest tax increase in living memory, an opinion poll showed on Friday.

The survey by Eurosondagem pollsters showed the Social Democrats of Prime Minister Pedro Passos Coelho down 3 percentage points from a month earlier at 26.9 percent.

Its ruling coalition partner, the rightist CDS-PP, was little changed at 10.1 percent.

The Socialists edged up to 35 percent support and stand just behind the combined total for the ruling coalition, the difference between them being smaller than the poll's margin of error of 3.05 percent.

The previous Eurosondagem poll was published just before the 2013 budget was unveiled. The government insists the hefty tax hikes are the only way to meet the fiscal goals under an EU/IMF bailout, without which debt-ridden Portugal would lose all credibility and be unable to finance itself.

Bailout austerity has already caused the country's worst recession since the 1970s.

Although it was the previous Socialist administration that requested the bailout in April 2011, the Socialists have turned against the belt-tightening drive in the past two months and say Portugal's experiment with austerity has failed.

Portugal's economic situation is becoming more critical with increasing signs of a deepening slump. Workers staged a general strike this week and opposition to austerity is rising.

Two smaller left-wing parties, the Communist-Green alliance and the Left Bloc, have gained popularity and have risen to around 10 percent support each, the survey showed.

The main ruling party, which took power in June 2011, has already hit levels of around 24 percent support in other polls.

The government, elected for four years, has a solid majority in parliament and there is little chance of an early election.

The new poll, published in the online version of Expresso weekly newspaper, surveyed 1,033 people between November 7 and 13.

(Reporting By Andrei Khalip; editing by Robert Woodward)

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Jerusalem and Tel Aviv under rocket fire, Netanyahu warns Gaza

GAZA (Reuters) - Palestinian militants nearly hit Jerusalem with a rocket for the first time in decades on Friday and fired at Tel Aviv for a second day, in a stinging challenge to Israel's Gaza offensive after an Egyptian bid to broker a truce.

The attacks came just hours after Egypt's prime minister, denouncing what he described as Israeli aggression, visited the Gaza Strip and said Cairo was prepared to mediate.

Israel began bombing Gaza on Wednesday with an attack that killed the Hamas military chief. It says its campaign is in response to Hamas missiles fired on its territory. Hamas stepped up rocket attacks in response.

Israeli police said a rocket fired from Gaza landed in the Jerusalem area, outside the city, on Friday.

It was the first Palestinian rocket since 1970 to reach the vicinity of the holy city, which Israel claims as its capital, and was likely to spur an escalation in its three-day old air war against militants in Hamas-run Gaza.

Rockets nearly hit Tel Aviv on Thursday for the first time since Saddam Hussein's Iraq fired them during the 1991 Gulf War. An air raid siren rang out on Friday when the commercial centre was targeted again. Motorists crouched next to cars, many with their hands protecting their heads, while pedestrians scurried for cover in building stairwells.

The Jerusalem and Tel Aviv strikes have so far caused no casualties or damage, but could be political poison for Prime Minister Benjamin Netanyahu, favored to win re-election in January on the strength of his ability to guarantee security.

"The Israel Defence Forces will continue to hit Hamas hard and are prepared to broaden the action inside Gaza," Netanyahu, signaling a possible ground campaign, said hours earlier.

A Hamas source said the Israeli air force launched an attack on the house of Hamas's commander for southern Gaza which resulted in the death of two civilians, one a child.

Officials in Gaza said 22 Palestinians had been killed in the enclave since Israel began the air offensive with the declared aim of stemming surges of rocket strikes that have disrupted life in southern Israeli towns.

The Palestinian dead include eight militants and 14 civilians, among them seven children and a pregnant woman. Three Israelis were killed by a rocket on Thursday.

A solidarity visit to Gaza by Egyptian Prime Minister Hisham Kandil, whose Islamist government is allied with Hamas but also party to a 1979 peace treaty with Israel, had appeared to open a tiny window to emergency peace diplomacy.

Kandil said: "Egypt will spare no effort ... to stop the aggression and to achieve a truce."

But a three-hour truce that Israel declared for the duration of Kandil's visit never took hold. Israel said more than 35 rockets launched from the Gaza Strip hit its territory and 86 were intercepted by the Iron Dome anti-missile system.

Israel denied Palestinian assertions that its aircraft struck while Kandil was in the enclave.

TEL AVIV ROCKET

Israel Radio's military affairs correspondent said the army's Homefront Command had told municipal officials to make civil defense preparations for the possibility that fighting could drag on for seven weeks. An Israeli military spokeswoman declined to comment on the report.

The Gaza conflagration has stoked the flames of a Middle East already ablaze with two years of Arab revolution and a civil war in Syria that threatens to leap across borders.

It is the biggest test yet for Egypt's new President Mohamed Mursi, a veteran Islamist politician from the Muslim Brotherhood who was elected this year after last year's protests ousted military autocrat Hosni Mubarak.

Egypt's Muslim Brotherhood are spiritual mentors of Hamas, yet Mursi has also pledged to respect Cairo's 1979 peace treaty with Israel, seen in the West as the cornerstone of regional security. Egypt and Israel both receive billions of dollars in U.S. military aid to underwrite their treaty.

Mursi has vocally denounced the Israeli military action while promoting Egypt as a mediator, a mission that his prime minister's visit was intended to further.

A Palestinian official close to Egypt's mediators told Reuters Kandil's visit "was the beginning of a process to explore the possibility of reaching a truce. It is early to speak of any details or of how things will evolve".

Meanwhile, Israel has begun drafting 16,000 reserve troops, a possible precursor to invasion. Tanks and self-propelled guns were seen near the border area of Friday.

Hamas fighters are no match for the Israeli military. The last Gaza war, involving a three-week long Israeli air blitz and ground invasion over the New Year period of 2008-2009, killed more than 1,400 Palestinians, mostly civilians. Thirteen Israelis also died.

Tunisia's foreign minister was due to visit Gaza on Saturday "to provide all political support for Gaza" the spokesman for the Tunisian president, Moncef Marzouki, said in a statement.

The United States asked countries that have contact with Hamas to urge the Islamist movement to stop its rocket attacks.

Hamas refuses to recognize Israel's right to exist. By contrast, Palestinian President Mahmoud Abbas, who rules in the nearby West Bank, does recognize Israel, but peace talks between the two sides have been frozen since 2010.

Abbas's supporters say they will push ahead with a plan to have Palestine declared an "observer state" rather than a mere "entity" at the United Nations later this month.

(Additional reporting by Ori Lewis, Ari Rabinovitch, Jeffrey Heller and Crispian Balmer in Jerusalem; Writing by Jeffrey Heller and Douglas Hamilton; Editing by Peter Graff)

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Military plane crashes in south France: authorities

TOULOUSE, France (Reuters) - A military aircraft crashed in southeastern France on Friday, the local fire brigade said.

It was not immediately clear how many people were on board or whether there were survivors from the crash in an uninhabited part of the Lozere region near the city of Avignon.

French media reported that the plane was an Algerian military transport travelling to Algeria from Paris but it was not immediately possible to verify those reports.

(Reporting By Jean Decotte, writing by Nick Vinocur)

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Iran issues warning after targeting U.S. drone

DUBAI (Reuters) - Iran said it would deal decisively with any foreign encroachment into its airspace, an apparent warning to the United States after one of its surveillance drones was targeted by Iranian warplanes last week.

On Thursday U.S. officials said the unarmed Predator drone was in international airspace when Iranian warplanes opened fire on it on November 1. The aircraft was not hit.

The intercept was the first time Tehran had fired at an unmanned U.S. aircraft in their 33 year stand-off.

"The defenders of the Islamic Republic will respond decisively to any form of encroachment by air, sea or on the ground," Fars news agency quoted General Massoud Jazayeri, a senior armed forces commander, as saying on Friday.

"If any foreign aircraft attempts to enter our airspace our armed forces will deal with them," he said. Jazayeri did not mention the drone incident specifically.

According to the Pentagon, two Soviet-designed SU-25 aircraft intercepted the Predator drone over Gulf waters about 16 nautical miles off the Iranian coast. After firing at the drone they followed it for several miles as it moved farther away from Iranian airspace.

Washington has issued a formal protest to the Iranian authorities via diplomatic channels.

Details of the incident emerged ahead of large-scale air defense drills due to start across several provinces in eastern Iran this week.

The "Velayat 4" maneuvers will be jointly held by the regular armed forces and the Islamic Revolutionary Guard Corps and will involve testing new radar and surveillance equipment, military commanders say.

(Reporting By Marcus George; Editing by Jon Boyle)

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Chinese state firms say reform should mean more growth

BEIJING (Reuters) - China's big state-owned enterprises argued for continued expansion on Friday, echoing outgoing President Hu Jintao's comments urging more investment in major government firms and curtailing hopes of reform in the bloated sector.

Party delegates spent day two of the 18th Communist Party Congress holding public debates on Hu's speech at which they read out bits that they particularly liked. Reuters reporters heard no one disagreeing with what Hu said in a nearly two-hour-long speech.

At the opening of the congress on Thursday, Hu stressed the importance of continued one-party rule and how it was threatened by corruption, a reference to the downfall of one-time high-flying politician Bo Xilai.

He also suggested a further strengthening of the state in strategic sectors, with the possibility of more market-oriented competition in other sectors.

"The direction of the SOE (state-owned enterprise) reform should be: SOEs must be more market-oriented and they must keep strengthening their vitality and influence," Wang Yong, the head of a commission on supervising and administering state-owned assets, told reporters.

"Scholars may have different views, but that's the development need of the enterprises and the state."

Hu had said on Thursday that Beijing must "unwaveringly consolidate and develop the public sector of the economy".

"(We should) invest more state capital in major industries in key fields that comprise the lifeline of the economy and are vital to national security."

But outgoing Premier Wen Jiabao vowed in a speech earlier this year that Beijing would push ahead with monopoly-busting.

"We must move ahead with reform of the railway, power and other industries, complete and implement policies and measures aimed at promoting the development of the non-state economy, break monopolies and lower industry thresholds for new entrants," he had said.

State-owned enterprises and affiliated businesses account for more than half of output and employment in China, the world's second-biggest economy. They include power grid-operator State Grid, the world's seventh-biggest company.

Oil giants Sinopec Group and China National Petroleum Corp, parent of PetroChina, rank fifth and sixth, respectively. Of the 70 mainland companies on the 2012 Fortune Global 500 list, 65 are state-owned.

DRAG

Chinese reformers and Western governments say their sheer size and market dominance creates a drag on the economy through vast opportunity for corruption and waste, leading to higher costs for consumers.

Calls for reform built up as factions manoeuvred ahead of the once-in-decade leadership transition at the congress. When Xi Jinping, Hu's anointed successor, is in place he will be under immediate pressure to break the grip of inefficient SOEs and reinvigorate China's three-decade-long economic miracle.

But he will have to deal with the divisions within the party on policy.

Critics claim that without further reform of the state sector, China's growth will stagnate. They call for equal opportunity for private firms, which provide most of the new jobs in China.

On Friday, data for October showed the economy was pulling away from its slowest growth in three years. Analysts said that thanks to a raft of pro-growth policies rolled out by the government in recent months.

Wang, the state assets commission chief, admitted that the enterprises were saddled by a bloated workforce, a legacy of the planned economy.

But he and other state-firm bosses emphasized their importance to what they called "national economic security" in their gathering, laying out plans for further investment and overseas expansion.

The large state role prompted a U.S. congressional advisory panel to complain this week that Chinese investment in the United States had created a "potential Trojan horse".

The study, commissioned by U.S.-China Economic and Security Review Commission, found that Chinese-owned firms in the United States added between 10,000 and 20,000 workers in the past five years and helped shore up financially troubled U.S. firms.

The investment was spearheaded by Chinese state-owned enterprises that enjoyed government subsidies and other market-distorting policies that support industrial policy and non-market goals of the Chinese government, it said.

"Based on this juxtaposition, some will conclude that Chinese FDI (foreign direct investment) in the United States is a potential Trojan horse," the report concluded.

Chinese telecoms firm Huawei Technologies, the world's second-biggest telecoms equipment maker - and another telecommunications firm called ZTE - spent much of this year under siege by U.S. lawmakers who suspect Huawei has close ties to Beijing and that its equipment could be used for espionage.

The telcos are not state-owned enterprises. Huawei is owned by its employees and ZTE by different institutions.

The party congress ends on Wednesday, after which the new Standing Committee, at the apex of power, will be unveiled.

Only Xi and his deputy, Li Keqiang, are certain to be on what is likely to be a seven-member committee, and about eight other candidates are vying for the other places. (Editing by Nick Macfie and Raju Gopalakrishnan)

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Gold fever sweeps South Sudan ahead of new mining law

NANAKANAK, South Sudan (Reuters) - Taking a break from the toil of digging, Leer Likuam sat on the edge of a shallow trench, puffed his pipe and boasted he once found a 200-gram gold nugget bigger than his thumb.

In Nanakanak, a village of stick huts in an area that has attracted hundreds of diggers since Sudan's civil war ended in 2005, Likuam's find would have been lucrative but unexceptional.

"Everything is luck," he said through a translator. On an average day he might dig up six grams, worth around 1,200 South Sudanese pounds ($270), he said. "Some days you're lucky."

Word of Nanakanak's riches has spread. In the capital Juba, international mining firms are lining up at South Sudan's ministry of petroleum and mining, aiming to get their hands on part of the vast, unexplored territory.

Officials say firms from China, Australia, the United States, South Africa and other African countries plan to apply for licenses when new mining laws are passed later this month. After many delays, parliament is set to begin debate on the bill on Monday.

The South voted to secede from Sudan, then Africa's sixth-largest exporter of oil, in a referendum last year.

The new nation inherited three-quarters of the united country's oil production, but in January a row with Khartoum led it to shut down the industry whose receipts gave South Sudan 98 percent of its income.

The sudden loss of funds prompted Juba to introduce severe austerity measures, centralize and expand tax collection and explore fresh sources of revenue to replace petrodollars.

Oil production is expected to restart in the next couple of weeks, reaching around 230,000 bpd by the end of the month, but in the meantime the government hopes to pass mining legislation that will formalize the industry, let them tax precious metal and mineral exports and sell concessions to large-scale investors.

"It will diversify the economy. The mining sector has great potential," Petroleum and Mining Minister Stephen Dhieu Dau told Reuters.

VIRGIN TERRITORY

On the international market, Likuam's prize lump would fetch $11,000, an enormous sum in a country where the average teacher earns just 360 South Sudanese pounds, about $90, per month.

Likuam isn't the only man with the golden touch.

Around him dozens of other Toposa tribesmen and women, festooned with plastic necklaces, brass piercings and beaded amulets, hack away at the red soil with metal poles and shovels, digging small craters in a boozy revelry.

Despite the morning hour, girls distribute crates of lager, "sarko" moonshine and pitchers of bitter-smelling beer brewed from sorghum.

Many of the miners claim to have found nuggets of a rival size, or even larger.

Nobody knows the extent of South Sudan's mineral reserves because the 22-year war prevented exploration.

The latest geological surveys date back to the 1970s and 80s, but mining officials say diamond and gold deposits in South Sudan's mineral-rich neighbors are encouraging. They describe the 16-month-old country as virgin territory.

"We are neighbors to the DR Congo and Central African Republic so we can't rule anything out. Geology doesn't know borders," said James Kundu, acting director general for geological surveying at the ministry.

As well as gold and diamonds, he lists potential deposits of chromite, copper, uranium, manganese and a belt of iron ore, which is often associated with aluminum. A lot of records were lost in the war. One report by a Belgian company was half-eaten by termites, Kundu said.

"There's a lot of stuff here but people don't know about it. They're too focused on oil," said one international gold trader who preferred not to be named in connection with the as-yet unregulated trade.

"It's the best stuff I've seen in central Africa," he said, explaining that the samples he's tested show a purity of over 22 carats (91.6 percent gold) compared to around 18 carats in the Central African Republic.

COW BANKING

Locally, artisanal miners like Likuam are making their fortune, investing much of the money in the traditional method of storing wealth - cattle. In the last year alone, Likuam has bought 10 cows, each worth around 1,000 pounds.

In another nearby artisanal mining spot called Napotpot, Julia Lakalay panned the red earth with water she had carried two km (one mile).

"The gold mining has completely changed my life," she said, swathed in colored beads and spattered with mud. "In my village I could not even earn 1 pound. Now I'm earning 200 pounds per day."

Merchants in Kapoeta, a local town of tin-shack pubs, dirt roads and scampering goats, say the price of gold is inflated by the scarcity of dollars, a problem across the country since the oil shutdown.

In the absence of banks or an official exchange rate between the pound and the Kenyan shilling, Kapoeta's economy relies on gold as a form of cross-border currency.

"The main purpose to buy gold is to change currency. We buy gold, take it to Kenya, sell it to dealers, and buy more stock to bring back," said Kenyan businessman Junius Njeru, weighing a pile of gold nuggets.

"It's in your pocket, nobody searches you," he said, describing the process of taking the gold across the border.

Miners sell the gold for around 200 pounds ($46) per gram, leaving traders a narrow profit margin for resale on the international market at $55.

"BIG POTENTIAL"

Officials hope the new mining law will bring this trade out of the black market and, by selling land to prospecting companies, eventually let the national and state governments benefit from the underground treasure.

The mining companies with 42 so-called "grandfather" exploration permits approved by the semi-autonomous southern government before independence will have two weeks to claim their licenses after the bill passes through parliament, which could take as little as one day.

Norway, the United States and Botswana helped draft the law that caps large-scale exploration licenses at 2,500 square km. To prevent exploration companies from sitting on the land, the law forces them to surrender 50 percent of their concession every time they renew their contracts, which will be variable.

Firms that find enough minerals to start digging can convert their license into a mining permit.

"If you put them in a queue, there's at least 20 meters of investors waiting to get a license ... Others must know that if they want something, they must come quickly," said Rainer Hengstmann, a ministry adviser working for consultant firm Adam Smith International.

However, in a landlocked country with just 300 km of paved road, Hengstmann cautioned it will take many years to get commercial mining off the ground.

"You need a railway if you want to go large-scale. It will take time. They really need roads and power," he told Reuters, echoing investors' complaints about the lack of infrastructure.

Ministry officials say two firms, New Kush and Consolidated Mineral and Energy Resources Investment Company (CMERIC), are exploring actively on their grandfather licenses.

But Equator Gold, a British company working on the CMERIC license, says it will still take several years to actually produce anything.

"I think there's going to be a big rush to get land but exploration takes a long time," said Emma Parker, the firm's chief operations officer. "The progress has been slow but the geology is interesting. There's big potential."

(Editing by Alexander Dziadosz and Sonya Hepinstall)

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