Kyrgyzstan could be "new Afghanistan", says president

BERLIN (Reuters) - The president of Kyrgyzstan warned in his first visit to the West on Tuesday his central Asian republic would suffer the kind of turmoil seen in the south of the region unless it consolidated democratic reforms.

"If we don't develop democracy further in Central Asia or succeed in building a parliamentary democracy in Kyrgyzstan, then a new Afghanistan will arise in Central Asia," President Almazbek Atambayev told a joint news conference in Berlin with German Chancellor Angela Merkel.

The country of 5.5 million people lies on a drug trafficking route from Afghanistan and is home to Russian and U.S. military air bases, while China is extending its economic reach across the border to counterbalance Washington and Moscow.

Kyrgyzstan has overthrown two presidents since 2005 and about 500 people died in clashes in 2010 between ethnic Kyrgyz and Uzbeks. Atambayev became president in 2011 in the first peaceful transition of power in its post-Soviet history.

One of the poorest of the former Soviet republics, the Kyrgyz economy relies heavily on production from a single gold mine and cash sent home by migrant workers. It lacks the rich energy reserves of some neighbours such as Kazakhstan.

"We know what the strategic importance of this region is, you only have to look at the neighbouring countries," Merkel said at the news conference with Atambayev.

Merkel added that Europe must be "fair" in its relations with all of Central Asia and not focus on "countries that have raw materials or are just strategically important as withdrawal routes from Afghanistan".

The two leaders discussed the human rights situation in Kyrgyzstan, including the case of journalist Azimzham Askarov, a campaigner against police brutality who was jailed for life in 2010 on charges of inciting ethnic violence in the city of Osh.

Askarov, an ethnic Uzbek, was awarded the International Press Freedom Award in absentia this year by the Committee to Protect Journalists.

"I got the impression that the president is very well aware of this situation," said Merkel, adding that they discussed the need to respect the rights of Kyrgyzstan's ethnic minorities.

Atambayev said he would like to see Askarov's case reopened if there were grounds, "but it must all be strictly according to the law and be decided by the courts, not by the president".

"We don't want a clan or a family or a person taking our decisions," said Atambayev, whose predecessor Kurmanbek Bakiyev was ousted in 2010 after being accused of nepotism, corruption and brutality. He took shelter in Belarus.

(Additional reporting by Andreas Rinke; editing by Gareth Jones and Andrew Roche)

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Syrian rebels battle army near Damascus

BEIRUT (Reuters) - Syrian rebels clashed with forces loyal to President Bashar al-Assad near Damascus airport on Tuesday, battling for the capital's outskirts after 20 months of conflict which the United Nations said has driven half a million people from the country.

Fighting near the airport, 20 km (12 miles) south-east of Damascus city center, is part of a broader confrontation between Assad's forces and rebels who hold a near continuous arc of territory from the east to the southwest of Assad's power base.

"There were very heavy clashes since yesterday in the town of Haran, on the eastern side of the airport, and there has been intermittent fighting in the Aqraba area by the airport," said rebel spokesman Mussab Abu Qitada.

"The rebels are trying to maintain an encirclement of the airport. They are also still surrounding the Aqraba air base, on the international airport road," he said by Skype from Damascus.

The center of the capital, shielded for months from the violence which has killed 40,000 people since March 2011, echoed to the sound of shelling from Monday evening, residents said.

The shelling appeared to be directed from the Qasioun mountain range, overlooking northern Damascus, towards the rebellious southern suburbs.

The mainly Sunni Muslim rebels have made military gains against the forces still loyal to Assad, many of them from Syria's Alawite religious minority. The rebels have seized military bases across the country in the last month and are starting to encircle the capital, where power cuts and food shortages are hurting residents bracing for winter.

"We are barely surviving," said a woman in the Midan district who would only identify herself as Umm Ahmed. She said she queued in vain from 6 a.m. until midday at bakeries which ran out of bread before she could buy any at the normal price, leaving her looking for supplies at much inflated rates.

"If I want to buy it on the street, the black market price is 150 lira (about $2) - three times the cost," she said. "We are living without electricity and water, and the food is very expensive."

Central Damascus has been suffering up to 12 hours of power cuts a day, residents say. Movement around the city, peppered with security checkpoints, is increasingly difficult and soldiers, security forces and local vigilantes are everywhere.

HALF A MILLION REFUGEES

The conflict started with street protests inspired by uprisings across the Arab world. Demonstrations were met with gunfire by Assad's forces and spiraled into the most protracted and destructive battle of the Arab uprisings.

The fighting has driven hundreds of thousands of Syrians into neighboring countries and the United Nations refugee agency UNHCR said on Tuesday more than half a million were either registered or awaiting registration in the region.

Lebanon is now host to 154,387 registered Syrian refugees, Jordan has 142,664, Turkey 136,319, Iraq 65,449 and North Africa 11,740, UNHCR said in a statement issued in Geneva. In addition, there are more than 1.5 million Syrians who fled violence in their homes and are displaced in safer areas within the country.

Large numbers of Syrians have also crossed into neighboring countries but have not yet come forward to register for refugee status and assistance, it said. These include about 100,000 in Jordan, 70,000 each in both Turkey and Egypt and tens of thousands in Lebanon, it said, citing government estimates.

Assad's political and armed opponents, dogged by splits and rivalries throughout their battle to end his family's 42-year rule, have established a more unified political opposition and military command, hoping to win international recognition and stronger support on the battlefield.

Abu Moaz al-Agha, a leader and spokesman of the powerful Ansar al-Islam Gathering which includes many Islamist rebel brigades, said the new, Islamist-dominated military command elected in Turkey at the weekend deserved more foreign backing.

"What we need now is the heavy weapons and we expect to get them after the formation of this. The anti-armour and anti-aircraft weapons are what we are expecting," he told Reuters by Skype from Turkey before heading on a trip to the Gulf.

"The Qataris and the Saudis gave us positive promises. We will see what will happen," he said, adding that officials from Western countries, who also attended the meeting in Turkey, had not mentioned arming the rebels but talked about "sending aid".

The new political opposition coalition, formed in Qatar last month, will meet officials from countries mostly opposed to Assad in Morocco on Wednesday, hoping for a clear recognition as the legitimate representatives of the Syrian people.

France, Britain, Turkey and the Gulf states have already granted the formal recognition. The European Union, in a meeting on Monday, moved a step closer towards recognition and the United States has suggested it could also endorse the coalition.

(Additional reporting by Erika Solomon and Mariam Karouny in Beirut; Editing by Alastair Macdonald)

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Mali PM forced to quit by army

BAMAKO (Reuters) - Mali's prime minister was forced to resign on Tuesday by the soldiers who staged a coup in March, complicating international efforts to help push Islamists from the north of the country.

Once a beacon of democracy in West Africa, Mali has been mired in crisis since ethnic Tuareg rebels and al Qaeda-linked Islamist fighters seized the northern two-thirds of the arid nation in the wake of the coup.

Although the soldiers handed over to a civilian president and prime minister under international pressure, they have remained powerful.

Cheick Modibo Diarra resigned as prime minister hours after he was arrested trying to leave the country for former colonial power France and was brought to the ex-junta's headquarters at a barracks in Kati, just outside Bamako.

"I, Cheick Modibo Diarra, hereby resign with my entire government," a nervous-looking Diarra said in a short statement broadcast on state television early on Tuesday. Diarra is a former NASA scientist and Microsoft chief for Africa who was made prime minister in April.

Fearing Mali has become a safe haven for terrorism and organised crime, West African leaders have signed off on a plan to send 3,300 soldiers to Mali to revamp Mali's army and then support operations to retake the north.

Diarra's forced resignation was a clear indication that those behind the coup still maintained considerable control however, a fact that could discourage international partners from backing the plan until civilian rule is strengthened.

France called for a new government to be formed quickly after the resignation.

"These developments underline the need for the rapid deployment of an African stabilization force," French Foreign Ministry spokesman Philippe Lalliot told reporters in Paris.

A spokesman for the former junta said Tuesday's events did not amount to a new coup and that interim civilian President Diouncounda Traore remained in place.

EX-JUNTA POWERFUL

Diarra was forced to step down during a meeting with ex-coup leader Captain Amadou Sanogo, according to Bakary Mariko, the spokesman.

Mariko accused Diarra of recording two speeches - the contents of which were not disclosed - and of urging his supporters to disrupt talks on the political crisis this week.

"This is not a coup. The president is still in place but the prime minister was no longer working in the interests of the country," Mariko said.

There was no immediate reaction from the president.

Downtown Bamako was calm, but the main road leading to Kati was blocked for security reasons, residents said.

Coup leader Sanogo has been repeatedly accused of meddling in politics since he stepped down and was officially tasked with overseeing reforms of Mali's army.

A senior west African diplomat said Diarra's resignation shows there was a de facto leader orchestrating things in Mali.

"Sanogo is pulling at the strings. Until we have a real transitional government in place, we will keep having these problems," the diplomat said, requesting not to be named.

Even before Diarra's arrest and resignation, support for the military intervention plan was not universal.

France is keenest to see military action to tackle the Islamist groups, including al Qaeda's North African wing, AQIM. But the United States and the United Nations have expressed concern, saying the plan lacks necessary detail.

The United States warned on Monday that Mali was "one of the potentially most explosive corners of the world".

Some of Mali's politicians support the idea of a foreign-backed military operation while others, including much of the military, say they need only financial and logistical support.

Mariko said the Malian army was ready to act even without international help.

"We want the help of the international community but if it has to wait until September or until an undefined date, then the Malian army will act to free its territory," he said.

Diarra was made prime minister when the junta officially handed power back to civilians. As the son-in-law of Moussa Traore, a former Malian coup leader and president, he appeared to have good ties with the military.

However, tensions became particularly acute in recent weeks, with analysts saying Diarra, a relative newcomer to Malian politics after years abroad, seemed keen to establish a political base of his own ahead of any future elections.

Mariko later told French television France 24 that the prime minister had failed in the two missions of liberating the north and the organizing free and transparent elections.

"Since he was appointed he has not acted as a man of duty. Everything he did was for his own personal agenda," he said.

(Additional reporting by David Lewis in Dakar and John Irish in Paris; Writing by David Lewis and Bate Felix; Editing by Pascal Fletcher, Joe Bavier and Catherine Evans)

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Brazil's Lula knew about vote buying scheme: newspaper

RIO DE JANEIRO (Reuters) - Former Brazilian President Luiz Inacio Lula da Silva knew about and used funds from a far-reaching vote-buying scheme to pay for personal expenses, according to testimony by a convicted former consultant to the ruling Workers' Party.

The testimony, reported on Tuesday by the Estado de S.Paulo newspaper, was given in September to Brazil's attorney general's office by Marcos Valerio, an advertising executive recently convicted as a bagman in the scheme.

Valerio also testified that an aide to the former president made veiled threats when the scandal erupted in efforts to keep him quiet, the newspaper said.

According to the report, Valerio gave the testimony voluntarily in a bid to reduce his sentence after he and 24 other former Lula aides and associates were convicted in a landmark trial heard by Brazil's Supreme Court.

Though he still received a stiff 40-year prison sentence, the circumstances of Valerio's testimony are likely to cast doubt on his claims. Among other crimes, Valerio was convicted for handling the money used in the scheme, which involved payoffs to legislators in exchange for Congressional support.

The trial exposed crimes at the core of the administration of Brazil's beloved former president and was hailed as a sign that the country is growing less tolerant of the corruption long rife in local, state, and national politics.

Lula, still Brazil's most influential political figure and a possible contender for a new run at the presidency in 2014, has denied any knowledge of the scheme since it first came to light in 2005, roiling the first of his two terms.

Though Lula's legacy has been tarnished by the convictions, the trial has done little to sap his star power - even after officials including a former treasurer of the PT, as the Workers' Party is known, and Jose Dirceu, his once-powerful chief of staff, were convicted.

That could change if the allegations made by Valerio were proven. Critics have long alleged that the scheme could not have been carried out without Lula's knowledge, or tacit approval, but so far no proof of either has surfaced.

'WE SHOULD KILL YOU'

The newspaper report said authorities already confirmed one of two deposits that Valerio alleged were made into a bank account controlled by a former Lula assistant. It also said that another Lula assistant, and now the director of the former president's foundation, at the time the scandal broke told Valerio that "there are people in the PT who think that we should kill you."

Lula's foundation declined to comment on the report. Marcelo Leonardo, Valerio's lawyer, also declined to comment.

The former president, who presided over eight years of sustained growth in Latin America's biggest country, left office in 2011 because Brazil's constitution prohibits more than two consecutive terms in the presidency. His approval ratings at the time approached 90 percent.

After a bout with throat cancer, Lula returned to politics this year and remains a friend and informal advisor to President Dilma Rousseff, a former bureaucrat and minister whom he hand picked to succeed him as the party's candidate. Rousseff was unknown to most voters at the time, but Lula's endorsement ensured her victory.

While Lula has said he will not run again if Rousseff decides to stand for re-election, some analysts believe she could decline. Rousseff's primary chore as president thus far has been rekindling growth in the world's sixth-largest economy, which has slowed to a crawl for most of the past two years.

(Reporting by Pedro Fonseca, Ana Flor and Paulo Prada; Editing by Todd Benson and Philip Barbara)

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Mandela responding to lung infection treatment

JOHANNESBURG (Reuters) - Former South African President Nelson Mandela, who is 94 and has been in hospital since Saturday for tests, has suffered a recurrence of a lung infection but is responding to treatment, the government said on Tuesday.

The revered anti-apartheid leader and Nobel Peace laureate is spending his fourth day in hospital in the capital, Pretoria.

Known affectionately by his clan name "Madiba", Mandela remains a hero to many of South Africa's 52 million people and two brief stretches in hospital in the past two years made front page news.

"Doctors have concluded the tests and these have revealed a recurrence of a previous lung infection, for which Madiba is receiving appropriate treatment and he is responding to the treatment," the government said in a statement.

Mandela was admitted to the Pretoria military hospital on Saturday after being flown from his home village of Qunu in a remote part of the Eastern Cape province.

Until now, authorities had given few details about the reason for his latest visit to hospital.

In an interview broadcast on South Africa's eNCA television channel, Mandela's Mozambican-born wife Graca said the former president's "sparkle" was fading.

When he was admitted to hospital on Saturday, officials stressed there was no cause for concern although domestic media reports suggested senior members of the government and people close to him had been caught unawares.

ROBBEN ISLAND

On the streets, ordinary South Africans crossed their fingers for his recovery. Leading cartoonist Zapiro depicted Mandela asleep in his hospital bed with hundreds of "Get Well" cards flying through the window like a flock of birds.

"He's old and I hope he gets better soon. He means a lot to the world," 25-year-old legal researcher Liezel Jacobs said.

Mandela, South Africa's first black president and a global symbol of resistance to racism and injustice, spent 27 years in apartheid prisons, including 18 years on the windswept Robben Island off the coast of Cape Town.

He was released in 1990 and went on to be elected president in the historic all-race elections in 1994 that ended decades of white-minority rule in Africa's most important economy.

He used his unparalleled prestige to push for reconciliation between whites and blacks, setting up a commission to probe crimes committed by both sides in the anti-apartheid struggle.

Mandela's African National Congress (ANC) has continued to govern since his retirement from politics in 1999, but has been criticized for perceived corruption and slowness in addressing apartheid-era inequalities in housing, education and healthcare.

On Tuesday, the influential South African Council of Churches launched a blistering attack on the ANC, accusing its leaders of moral decay and of abandoning Mandela's goal of a non-racial democracy built from the ashes of apartheid.

Mandela spent time in a Johannesburg hospital in 2011 with a respiratory condition, and again in February this year because of abdominal pains. He was released the following day after a keyhole examination showed there was nothing serious.

He has since spent most of his time in Qunu.

His fragile health prevents him from making any public appearances, although he has continued to receive high-profile domestic and international visitors, including former U.S. President Bill Clinton in July.

(Reporting by Ed Cropley and Ed Stoddard; Editing by Pascal Fletcher and Alison Williams)

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IMF loan to Egypt delayed as crisis deepens

CAIRO (Reuters) - A vital $4.8 billion International Monetary Fund loan to Egypt will be delayed until next month, its finance minister said on Tuesday, intensifying the political crisis gripping the Arab world's most populous nation.

As rival factions gathered in Cairo and Alexandria for a new round of demonstrations, Finance Minister Mumtaz al-Said said the delay in the loan agreement was intended to allow time to explain a heavily criticised package of economic austerity measures to the Egyptian people.

The announcement came after President Mohamed Mursi on Monday backed down on planned tax increases, seen as key for the loan to go ahead. Opposition groups had greeted the tax package, which had included duties on alcoholic drinks, cigarettes and a range of goods and services, with furious criticism.

"Of course the delay will have some economic impact, but we are discussing necessary measures (to address that) during the coming period," the minister told Reuters, adding: "I am optimistic ... everything will be well, God willing."

Prime Minister Hisham Kandil said Egypt had requested that the loan be delayed by a month.

"The challenges are economic not political and must be dealt with aside from politics," he told a news conference.

Kandil said the reforms would not hurt the poor. Bread sugar and rice would not be touched, but cigarettes and cooking oil would go up and fines would be imposed for public littering. In a bid to rebuild consensus, he said there would be a national dialogue about the economic program next week.

In Washington, the IMF said Egypt had asked for the loan to be postponed "in light of the unfolding developments on the ground". The Fund stood ready to consult with Egypt on resuming discussions on the stand-by loan, a spokeswoman said.

GUNMEN OPEN FIRE

On the streets of the capital, tensions ran high after nine people were hurt when gunmen fired at protesters camping in Tahrir Square, according to witnesses and Egyptian media.

The opposition has called for a major demonstration it hopes will force Mursi to postpone a referendum on a new constitution.

Outside the presidential palace, dozens of protesters succeeded in pushing down two giant concrete blocks forming a small part of a wall blocking access to the site.

Thousands of flag-waving Islamist Mursi supporters, who want the vote to go ahead as planned on Saturday, assembled at a nearby mosque, setting the stage for further street confrontations in a crisis that has divided the nation of 83 million.

In Egypt's second city of Alexandria, thousands of rival demonstrators gathered at separate venues. Mursi's backers chanted: "The people want implementation of Islamic law," while his opponents shouted: "The people want to bring down the regime."

The upheaval following the fall of Hosni Mubarak last year is causing concern in the West, in particular the United States, which has given Cairo billions of dollars in military and other aid since Egypt made peace with Israel in 1979.

The turmoil has also placed a big strain on the economy, sending foreign currency reserves down to about $15 billion, less than half what they were before the revolt two years ago as the government has sought to defend the pound.

"Given the current policy environment, it's hardly a surprise that there's been a delay, but it is imperative that the delay is brief," said Simon Williams, HSBC economist in Dubai. "Egypt urgently needs that IMF accord, both for the funding it brings and the policy anchor it affords."

The IMF deal had been seen as giving a seal of approval to investors and donors about the government's economic plans, vital for drawing more cash into the economy to ease a crushing budget deficit and stave off a balance of payments crisis.

MASKED ATTACKERS

In central Cairo, police cars surrounded Tahrir Square in central Cairo, the first time they had appeared in the area since November 23, shortly after a decree by Mursi awarding himself sweeping temporary powers that touched off widespread protests.

The attackers, some masked, also threw petrol bombs that started a small fire, witnesses said.

"The masked men came suddenly and attacked the protesters in Tahrir. The attack was meant to deter us and prevent us from protesting today. We oppose these terror tactics and will stage the biggest protest possible today," said John Gerges, a Christian Egyptian who described himself as a socialist.

The latest bout of unrest has so far claimed seven lives in clashes between the Islamist Muslim Brotherhood and opponents who are also gathering outside Mursi's presidential palace.

The elite Republican Guard which protects the palace has yet to use force to keep protesters away from the graffiti-daubed building, now ringed with tanks, barbed wire and concrete barricades.

The army has told all sides to resolve their differences through dialogue, saying it would not allow Egypt to enter a "dark tunnel". For the period of the referendum, the army has been granted police powers by Mursi, allowing it to arrest civilians.

The army has portrayed itself as the guarantor of the nation's security, but so far it has shown no appetite for a return to the bruising front-line political role it played after the fall of Mubarak, which severely damaged its standing.

OPPOSITION MARCHES

Leftists, liberals and other opposition groups called for marches say the hastily arranged constitutional referendum is polarizing the country and could put it in a religious straightjacket.

Mohamed ElBaradei, a prominent opposition leader and Nobel prize winner, said the referendum should be postponed for a couple of months due to the chaotic situation.

"This revolution was not staged to replace one dictator with another," he said in an interview with CNN.

Opposition leaders want the referendum to be delayed and hope they can get sufficiently large numbers of protesters on the streets to change Mursi's mind.

Islamists, who dominated the body that drew up the constitution, have urged their followers to turn out to show support for the president and for a referendum they feel sure of winning.

The opposition says the draft constitution fails to embrace the diversity of the population, a tenth of which is Christian, and invites Muslim clerics to influence lawmaking.

(Writing by Giles Elgood; Editing by Peter Graff and Will Waterman)

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Jordan king pardons jailed protesters

AMMAN (Reuters) - Jordan's King Abdullah ordered the release of more than one hundred protesters detained after calling for his downfall during last month's fuel price riots, officials said.

The king pardoned the protesters after meeting with tribal leaders, who demanded their release and argued their detention violated their freedom of expression, the officials added.

Jordan has so far largely avoided the unrest that has swept across the Middle East over the past two years, but the decision to raise fuel prices sparked riots, particularly in outlying areas inhabited by tribes, Jordan's original inhabitants.

A friend of the West, the monarch is seen by many Jordanians as a bulwark of stability, balancing the interests of the tribes and the increasingly assertive Palestinian majority.

Instability in Jordan would come at a dangerous time for the region, when Syria's war risks spilling across borders and Israel is bombing Palestinians in Islamist-run Gaza.

The king told the gathering he would ensure that there would no more arrests of people based on their political views and criticized the beatings of some protesters, officials present at the meeting said.

Jordan's monarchs have in the past pardoned dissidents to damp down disaffection.

Minister of Information Samih al Maaytah said 116 protesters would be released. Another 13 charged with vandalism during the riots were not pardoned.

Some of the detainees were among thousands who chanted the Arab Spring slogan "the people want the downfall of the regime" in provincial towns and the capital.

Most of the detainees were charged at the military dominated State Security Court with "unlawful gathering" and "subverting the system of government in the kingdom or inciting to resist it."

Although the charges carry sentences of up to five years, convictions in such cases are rare.

Among the detainees are 45 members of the Muslim Brotherhood, Jordan's largest opposition force, including a leader of the movement's political arm, the Islamic Action Front.

The kingdom has had two years of mostly peaceful street protests by Islamists, tribal figures and leftist opposition members, inspired by the wave of Arab revolts demanding wider political freedoms and a crackdown on corruption.

All the demonstrators have called for reforms, but in provincial areas inhabited by native East Bank citizens used to preferential access to state jobs, the protests have been driven largely by concern over keeping such jobs and the dwindling benefits going to tribal and rural areas that support the king.

(Reporting by Suleiman Al-Khalidi; Editing by Louise Heavens)

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Venezuela's Chavez undergoes cancer operation

CARACAS (Reuters) - Venezuelan President Hugo Chavez underwent surgery in Cuba on Tuesday for a recurrence of cancer that has thrown his future into jeopardy and upended politics in the South American OPEC nation.

"My dear friend and colleague, Comandante Hugo Chavez, is going through the toughest times of his life," said Ecuadorean President Rafael Correa, a fellow leftist. "He's being operated on right now. It's a very delicate operation."

Venezuela's 58-year-old socialist leader returned to politically allied Cuba for a fourth operation since mid-2011, after cancer was again discovered in the pelvic area soon after he won re-election in October.

Chavez's ministers have been parading on state TV to pledge loyalty to their boss but have given no details of his condition, which is treated virtually as a state secret. A Venezuelan government source confirmed Tuesday's operation.

Having declared himself "completely cured" twice in the past, the president has acknowledged he may be incapacitated, though he said he still hopes to recover in time to start his new, six-year term on January 10.

Chavez has named vice president and foreign minister Nicolas Maduro as a potential successor to lead his self-styled revolution in the South American nation of 29 million people that has the world's largest oil reserves.

Maduro, 50, a former bus driver and union activist, lacks his boss's charisma and political flair but would represent policy continuity should he formally take over. He has already taken control of day-to-day government operations.

The naming of Maduro has irked some in Venezuela's opposition, who say voters - not Chavez - will decide who follows him if an election is held within 30 days of his leaving office - as mandated by the constitution.

"Venezuela is not a monarchy with a prince as heir," said one opposition leader, Antonio Ledezma.

CHAVEZ "IN GOOD SPIRITS"

Should an election be held, opposition flag bearer Henrique Capriles, who lost to Chavez in the October presidential vote but scored a record 6.5 million votes for the opposition, could have a second crack at power.

In a newspaper interview on Tuesday, Capriles declined to speculate on a possible new presidential bid and repeated his best wishes to Chavez for recovery. But he criticized the secrecy surrounding the president's treatment.

"Venezuelans have the right to know," he said.

Chavez was assumed to be a patient once more at Havana's Cimeq hospital, though no official information on the situation was coming out of the communist-run Caribbean island.

Friends around the region have sent messages of support.

"He changed the history of Venezuela and of a large part of Latin America," said Correa, a central member of the Chavez-led Alba bloc of leftist nations in the region, after visiting him in Havana.

"He's in good spirits. You know what Hugo's like, always ready for tough battles with optimism and faith ... I'm not going to lie, we're very worried. It's a serious matter."

Chavez's health woes sparked a rally in Venezuela bonds, given many investors' preference for a more business-friendly government in Caracas. And in London, veteran emerging market investor Mark Mobius said any change to a more market-friendly government in Venezuela would encourage him to invest there once more.

"Regime change has probably entered into a countdown phase," New York-based Jefferies' managing director Siobhan Morden said in a research note.

POLICY PARALYSIS?

The health saga has once again eclipsed major national issues such as state elections on Sunday, a widely expected devaluation of the bolivar currency and a proposed amnesty for Chavez's jailed and exiled political foes.

"The nation is paralyzed," said Jorge Botti, head of the main private business group, Fedecamaras, urging the government to boost sales of dollars through its currency-control system.

The lack of greenbacks has left merchants struggling to import products and pushed the black market rate for the bolivar currency to four times its official rate of 4.3.

Venezuelans have been expecting a currency devaluation around the New Year, though Chavez's illness has thrown this in doubt.

Maduro is a committed socialist who has espoused Chavez's views on the international stage for the last six years, including his vitriol against Washington.

He has indicated he would follow Chavez's main policies, including heavy state control of the economy.

"Currency controls have worked well, and yes, they can be improved, they are going to be improved," Maduro said.

Western investors have increasingly shunned Venezuela under Chavez - especially given his nationalizations of large swathes of the economy - giving companies from China, Russia, Iran, Belarus and other allies a chance to grab footholds.

(Additional reporting by Eyanir Chinea in Caracas, Eduardo Garcia in Quito; Editing by Brian Ellsworth and Philip Barbara)

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Analysis: Berlusconi move could undermine Monti agenda in Italy

ROME (Reuters) - Silvio Berlusconi's decision to stand in Italian elections increases the risk of a large populist bloc in parliament that could severely hinder attempts to continue the legacy of outgoing Prime Minister Mario Monti.

Monti, the man foreign governments and investors desperately want to continue governing Italy, announced his intention to resign on Saturday, soon after Berlusconi's PDL party withdrew its support from his technocrat government and launched a frontal attack on his austerity policies.

Monti's decision followed Berlusconi's announcement that he would stand as the People of Freedom (PDL) candidate in the election expected in mid-February.

Some of the jitters on financial markets since then - which have pushed up the effective interest rate on Italian government bonds - seem to have been prompted by fears that the scandal-plagued media magnate could return as prime minister.

While this is a remote possibility given the PDL's low ratings in opinion polls, there could still be plenty of reason for nervousness.

Berlusconi's tactics appear aimed not at winning the election but to have enough power in the Senate or upper house to make life difficult for the pro-European center-left government expected to succeed Monti. It would also help Berlusconi, who was forced from power a year ago, to protect his troubled personal interests.

This could undermine center-left leader Pier Luigi Bersani's promise largely to continue Monti's prudent economic policies.

"This is Berlusconi's calculation. He hopes to have a hung Senate ... He hopes to be in a situation where he doesn't govern but prevents government," former diplomat and commentator Sergio Romano told Reuters.

BERLUSCONI WOOS ANGRY VOTERS

Berlusconi seems intent on reviving the fortunes of his faltering party by espousing the anti-Monti rhetoric of the populist 5-Star Movement. This has overtaken the PDL in opinion polls and is now drawing around 20 percent support due to public anger over the pain of a year of deficit-cutting austerity.

Monti has directly rebutted PDL criticism of his austerity policies since the weekend, painting them as ill-informed, and revived his repeated warnings against the danger of anti-European populism. European leaders have lined up to praise him and urge a continuation of his policies.

Since declaring his candidacy, Berlusconi has railed against Monti, accusing him of worsening Italy's situation with his rigid austerity mix of higher taxes and spending cuts.

"The Monti government has followed the Germano-centric policies which Europe has tried to impose on other states and it has created a crisis situation much worse than where we were when we were in government," he told his Canale 5 television.

Romano said Berlusconi wanted to revive his party by taking votes from the same constituency as the 5-Star Movement of foul-mouthed Genoese comedian Beppe Grillo, who calls Monti Rigor Montis and wants a referendum on whether to leave the euro.

Whereas Grillo's movement is web-based, Berlusconi has huge media power through his television and newspaper empire. "Berlusconi has more firepower," said Professor Gianfranco Pasquino of Bologna University.

"Berlusconi reads the polls and sees Grillo has 20 percent. He wants the votes of the angry people," Romano said.

He warned that Berlusconi can never be underestimated, despite problems in his Mediaset broadcasting empire and his legal problems - he is awaiting a verdict early next year in a trial in which he is accused of paying an underage prostitute.

"We have been mistaken many times. We have been burned many times," Romano said.

ELECTORAL REFORM SCUTTLED

Berlusconi's return to center stage and Monti's announced resignation have almost certainly scuttled attempts to reform a much maligned electoral law known popularly as the "pigsty".

Berlusconi wanted to keep the law partly because it imposes fixed lists where party leaders rather than the electorate choose members of parliament, ensuring he maintains his power of patronage and control.

Berlusconi's strategy will benefit his center-left enemies in the lower house of parliament where they will probably be guaranteed a strong working majority by a winner's premium - they are currently up to 20 points ahead of the PDL.

But the law also decides Senate seats based on votes in each region and this is where Berlusconi hopes to win enough in its traditional northern strongholds to stymie the center-left.

To this end he is busily working to revive his lapsed alliance with the anti-European and populist Northern League.

"I have to say it is a very, very unpleasant situation because you cannot see an easy way for this to resolve itself without leaving a considerable amount of power and influence in Berlusconi's hands," said Erik Jones, Director of European Studies at Bologna's Johns Hopkins University.

"The goal is not to control the Senate, the goal is to prevent anybody else controlling it. I think he has a good chance. If he can get the League," Jones told Reuters.

While Berlusconi's fortunes are clearly in steep decline and many in his own party are wary of anti-Monti and anti-European policies, the freezing of the current electoral law appears to have restored his grip on a party he created and bankrolled.

Party secretary Angelino Alfano, who as recently as last week looked to have a chance of gathering party moderates around him to lead the PDL into the election, has been humiliated by Berlusconi and is toeing his anti-Monti line enthusiastically.

"Berlusconi will make things very very difficult. The interpretation of the markets is negative, and it is rightly negative," Pasquino told Reuters.

(editing by David Stamp)

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Corruption probe shrouds Quebec in new darkness

MONTREAL (Reuters) - Half a century ago, a new crop of Quebec leaders sparked the so-called Quiet Revolution to eradicate the "Great Darkness" - decades of corruption that kept Canada's French-speaking province under the dominance of one party and the Catholic church.

The revolution's reforms, including cleaning up the way lawmakers were elected and secularizing the education system, seemed to work, paving the way for decades of growth, progress and prominence as Canada emerged as a model of democracy.

Fifty years later, a public inquiry into corruption and government bid-rigging suggests the province's politics are not as clean as Quebecers had hoped or believed.

Since May, when the inquiry opened in Montreal, Canadians have been getting daily doses of revelations of fraud through live broadcasts on French-language television stations. Corruption involving the Mafia, construction bosses and politicians, the inquiry has shown, drove up the average building cost of municipal contracts by more than 30 percent in Montreal, Canada's second-largest city.

Last month, Montreal Mayor Gerald Tremblay resigned as did the mayor of nearby Laval, Gilles Vaillancourt. Both denied doing anything wrong, but said they could not govern amid the accusations of corruption involving rigging of municipal contracts, kickbacks from the contracts and illegal financing of elections.

Tremblay has not been charged by police. Vaillancourt's homes and offices have been raided several times by Quebec's anti-corruption squad, which operates independently of the inquiry, but no charges have been filed against him either. Police said the raids were part of an investigation but they would not release further details.

"Quebecers lived for several years under the impression that they had found the right formula, that their parties were clean," said Pierre Martin, political science professor at the University of Montreal. Now, he said, "people at all levels are fed up."

The inquiry must submit its final report to the Quebec government by next October. It has exposed practices worthy of a Hollywood noir thriller - a mob boss stuffing his socks with money, rigged construction contracts, call girls offered as gifts, and a party fundraiser with so much cash he could not close the door of his safe.

"Even though we are in the early days, what is emerging is a pretty troubling portrait of the way public contracts were awarded," said Antonia Maioni, director of the McGill Institute for the Study of Canada in Montreal.

Quebec's Liberals, the force behind the Quiet Revolution, launched the inquiry as rumors of corruption swirled. The government then called an election for September, a year ahead of schedule, in what was seen as an attempt to stop damaging testimony hurting its popularity.

The tactic did not help. Jean Charest's Liberals lost to the Parti Quebecois, whose ultimate aim is to take the French-speaking province, the size of Western Europe, out of Canada.

'IT WASN'T COMPLICATED'

According to allegations at the inquiry, the corruption helped three main entities: the construction bosses who colluded to bid on contracts, the Montreal Mafia dons who swooped in for their share, and the municipal politicians who received kickbacks to finance campaigns.

In Quebec, the Mafia has been dominated by the Rizzuto family, with tentacles to the rest of Canada and crime families in New York and abroad. But recently the syndicate has been facing challenges from other crime groups in Montreal, according to the Toronto-based Mafia analyst and author Antonio Nicaso.

The reputed godfather of the syndicate, Vito Rizzuto, has been subpoenaed to appear before the commission, but the date for his testimony has not been set.

The hearings have zeroed in on four construction bosses and how their companies worked with the Mafia, bribed municipal engineers and provided funds for mayoralty campaigns in Montreal, the business capital for Quebec's 8 million people.

"It's not good for the economy," said Martin. "It's not good for any kind of legitimate business that tries to enter into any kind of long-term relationship with the public sector."

Quebec's anti-corruption squad has arrested 35 people so far this year, staging well-publicized raids on mayoral offices and on construction and engineering companies. The squad has arrested civil servants and owners of construction companies, among others.

"I now must suffer an unbearable injustice," Tremblay said in a somber resignation speech earlier this month after a decade as mayor of Montreal, saying he could not continue in office because the allegations of corruption were causing a paralysis at City Hall.

Some of the most explosive allegations at the inquiry, headed by Quebec Superior Court Justice France Charbonneau, came from Lino Zambito, owner of a now bankrupt construction company, and from a top worker for Tremblay's political party, Union Montreal.

Zambito, who is seen as one of the smaller players and who also faces fraud charges, described a system of collusion between organized crime, business cartels and corrupt civil servants, with payments made according to a predetermined formula.

"The entrepreneurs made money, and there was an amount that was due to the Mafia," Zambito told the inquiry. "It wasn't complicated."

Zambito said the Mafia got 2.5 percent of the value of a contract, 3 percent went to Union Montreal and 1 percent to the engineer tasked with inflating contract prices.

Tremblay did not respond to emails requesting comment on the allegations of corruption at city hall.

A former party organizer, Martin Dumont, alleged the mayor was aware of double bookkeeping used to hide illegal funding during a 2004 election.

Dumont said the mayor walked out of the room during a meeting that explained the double bookkeeping system, saying he did not want to know anything about it.

Dumont also described how he was called into the office of a fundraiser for Union Montreal to help close the door of a safe because it was too full of money.

"I think it was the largest amount I'd ever seen in my life," Dumont said at the inquiry.

GOLF, HOCKEY, ESCORTS

The inquiry also saw videos linking construction company players with Mafia bosses. In one police surveillance video, a Mafia boss was seen stuffing cash into his socks.

A retired city of Montreal engineer, Gilles Surprenant, described how he first accepted a bribe in the late 1980s after being "intimidated" by a construction company owner. Over the years he said he accepted over $700,000 from the owners in return for inflating the price of the contracts.

Another retired engineer, Luc Leclerc, admitted to bagging half a million dollars for the same service. He said the system was well-known to many at city hall and simply part of the "business culture" in Montreal. He also got gifts and paid golf trips to the Caribbean with other businessmen and Mafia bosses.

Gilles Vezina, who is currently suspended from his job as a city engineer, concurred.

"It was part of our business relationships to get advantages like golf, hockey, Christmas gifts" from construction bosses, he told the inquiry in mid-November.

The gifts didn't stop there. Vezina said he was twice offered the services of prostitutes from different construction bosses in the 1980s or early 1990s, which he said he refused.

The accusations are jarring for a country that prides itself on being one of the least corrupt places in the world, according to corruption watchdog Transparency International. But experts say corruption in Montreal was something of an open secret.

"The alarm signals have been going off here for 20 years and no one has done anything," said Andre Cedilot, a former journalist who co-wrote a book on the Canadian Mafia.

Quebec's new government has introduced legislation tasking the province's securities regulator with vetting businesses vying for public contracts and allowing it to block companies that do not measure up.

Anti-corruption activist Jonathan Brun was not optimistic.

"You've got to use modern technology," said Brun, a co-founder of Quebec Ouvert, a group that wants to make all information about contracts freely available rather than asking regulators to oversee individual companies. "You've got to change the entire system if you really want to fight corruption."

(Writing by Russ Blinch; Editing by Janet Guttsman, Mary Milliken and Prudence Crowther)

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