Analysis: Race politics may stunt reforms after Malaysia election

By Stuart Grudgings

KUALA LUMPUR (Reuters) - Malaysia's racially divisive election result has sparked a battle within the country's ruling party that is likely to slow Prime Minister Najib Razak's drive to reform the economy and roll back policies favoring majority ethnic Malays.

Najib's Barisan Nasional (BN) coalition retained power in Sunday's election in the multi-ethnic Southeast Asian nation. But the coalition lost the popular vote and turned in its worst-ever electoral performance as it was heavily abandoned by the minority Chinese and rejected by many voters of all races in urban areas.

Najib was quick to blame the outcome on the swing by Chinese voters to the opposition alliance, putting a racial interpretation on the result that has struck a chord with traditionalists in his United Malays National Organisation (UMNO).

UMNO, which dominates Barisan, now faces a leadership election in October or November that is likely to be fought between traditional and reformist wings.

"The ideological lines have been drawn within UMNO," said Khairy Jamuluddin, a reformist who heads the party's youth wing, in a posting on Twitter. "Game on."

Any major reforms are likely to be postponed until the leadership is decided, although Najib has said he will push for national "reconciliation" and press ahead with a $444 billion economic masterplan aimed at attracting investment and doubling incomes by 2020.

Conservatives have blamed ethnic polarization and Chinese "disloyalty" while reformists have urged Najib to expand steps to make UMNO more inclusive beyond its base of poor, rural Malays.

Utusan Malaysia, a newspaper controlled by UMNO, sought to portray Sunday's election result in racial terms, with one headline saying: "What more do the Chinese want?"

Malaysia's former and longest-serving prime minister, Mahathir Mohamad, a powerful figure in UMNO, was quoted by local media as saying "ungrateful Chinese" and "greedy Malays" were to blame for the result.

"It may be the starting shot of what's to come for Najib," Oi Kee Beng, deputy director of Singapore's Institute of Southeast Asian Studies, said of conservative reactions to the result. "At the same time, I think he is their (UMNO's) best asset despite everything."

FRAUD

Najib also has to deal with a strong opposition that is claiming that Barisan won the election through fraud. On Wednesday, tens of thousands of opposition activists thronged a stadium on the outskirts of the capital Kuala Lumpur in response to a call from opposition leader Anwar Ibrahim.

"This is merely the beginning of the battle between the people and an illegitimate, corrupt and arrogant government," Anwar, a former deputy prime minister, told the crowd, many of whom wore black to symbolize mourning.

Najib, the 59-year-old son of a former prime minister, had far higher approval ratings than his party in the run-up to the election and has few obviously strong rivals to replace him.

Taking power in 2009, he staked his fortunes on reforms aimed at spurring growth, increasing transparency and dismantling affirmative action policies.

But Najib's ambitions have been curbed by conservative interests within UMNO. He has failed to come up with major steps to roll back the ethnic privileges that are seen as having benefited an elite of well-connected Malays more than the poor majority.

The government does not provide an ethnic breakdown of the population, but Malays make up about 60 percent of the 28 million people, while Chinese comprise more than 25 percent. The country also has a significant minority of ethnic Indians.

Barisan won 133 seats in the 222-member parliament, but only 47 percent of the popular vote, compared to the opposition's 50 percent.

"The polarization in this voting trend worries the government," Najib said. "We are afraid that if this is allowed to continue, it will create tensions."

But Barisan has also come in for criticism from younger voters for corruption and patronage politics that critics say have been the hallmark of its 56 years in power.

Liew Chin Tong, an opposition member of parliament from the southern state of Johor, said Najib appeared to be taking the wrong message from the election result.

"It was not just the Chinese who swung against Barisan Nasional. There were many young first-time and second-time voters who voted against the BN," he told Reuters.

Najib now looks more vulnerable to traditionalists in his party who are opposed to his tentative steps to phase out the policies that favor ethnic Malays, introduced two years after traumatic race riots in 1969.

Those policies have been a pillar of UMNO's support but have been a prime cause of ethnic Chinese and Indian alienation and investors say they stunt growth and investment in Southeast Asia's third-largest economy.

Najib's efforts to roll back these policies and other politically sensitive reforms - such as the introduction of a consumption tax to reduce Malaysia's dependence on oil revenues and lowering fuel and food subsidies to tackle a chronic budget deficit - could be put on the backburner for now.

"The outlook for direct investment will remain uncertain until it becomes clearer whether or not Najib's reform-minded policies will continue," HSBC economists said in a note after the result.

The opposition's Liew said Najib's choices of cabinet members in the coming days would be a crucial indication of whether his new government would try to appeal across ethnic groups or only to its Malay base.

"His comments on the Chinese is rhetoric," Liew said. "What we need to see is who he will include in his cabinet. Will it be made up of UMNO extremists or younger members from the middle ground? We also have to see if he will include the Chinese."

(Additional reporting by Niluksi Koswanage, Siva Sithraputhran, Anuradha Raghu and Angie Teo; editing by Raju Gopalakrishnan)

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Analysis: Syria has limited response options

BEIRUT (AP) — The Syrian regime on Tuesday dispatched an obscure proxy, a Damascus-based Palestinian militant group, to threaten retaliation for two Israeli airstrikes over the weekend.

The relatively tepid response to Israel's breach of Syrian sovereignty highlighted Syrian President Bashar Assad's limited options as he, along with allies Iran and Lebanon's Hezbollah, is bogged down at home in a fight for survival against armed rebels.

Assad and visiting Iranian Foreign Minister Ali Akbar Salehi denounced Israel on Tuesday, but stopped short of promising retaliation. Commenting on the airstrikes for the first time, Assad said Syria is "capable of facing Israel's ventures" while Salehi said "it's high time to deter the Israeli occupation" from launching more attacks.

The airstrikes, which Israeli officials say targeted advanced Iranian missiles intended for Hezbollah, marked a sharp escalation of Israel's involvement in the Syrian civil war. They also raised fears that a conflict that has repeatedly spilled over Syria's borders in the past 26 months could turn into a full-fledged regional war.

Assad's regime might be reluctant to open a new front against Israel with his army already stretched thin in the deadlocked fight with the rebels, but he has a history of operating through proxies such as Hezbollah. One Iranian official hinted the Islamic militant group might take the lead.

Hezbollah has in the past struck Jewish or Israeli targets abroad.

On Tuesday, the pro-government newspaper al-Watan also said the Syrian leadership is now permitting Syrian-based Palestinian factions to "carry out anti-Israel attacks from the Golan and announced its readiness to provide the Lebanese resistance (Hezbollah) with all kinds of weapons."

The newspaper said the Syrian army has a list of potential Israeli targets and they "would be bombarded in the event of any new Israeli aggression."

Israel's government also appears to be steering away from broader confrontation. It has not confirmed officially that it was behind the attacks, but officials have said the strikes were meant to deprive Hezbollah of Iranian weapons shipped via Syria, not to target the Assad regime.

Still, Israel raised the risk of getting drawn into the fighting by striking three times: once in January and then again on Friday and Sunday. Israel also signaled it will keep hitting shipments of guided missiles and other advanced weapons if it suspects they are meant for Hezbollah, a militia it has fought repeatedly, including in a 2006 war.

Since the weekend, Syrian and Iranian officials have repeatedly condemned the Israeli attacks, but have not said what they would do in response. Hezbollah has remained silent.

"At the end of the day, it's an issue of survival (for Assad) and retaliation will further endanger that survival," said Bilal Saab, director of the Institute for Near East and Gulf Military Analysis, North America. "The most existential threat (to the regime) is the rebels, not Israel."

Assad and his late father and predecessor, Hafez, rarely engaged Israel directly in the last four decades. They kept Syria's frontier with Israel largely quiet, even though Israel captured and later annexed Syria's Golan Heights. Syria also held its fire when Israeli jets bombed a suspected Syrian nuclear reactor site in 2007.

Instead, the Syrian regime has operated through proxies, mainly Hezbollah, but also a small Palestinian militant group, the Popular Front for the Liberation of Palestine-General Command. The group broke away from another faction, the PFLP, in the 1960s, and is widely discredited among Palestinians as a lackey of the Syrian regime.

Anwar Raja, a spokesman for the PFLP-GC, said that once officially instructed by the government, the group is ready to "direct blows at the Zionist enemy at any time and place that would serve the Palestinian cause."

Failure to retaliate for the Israeli airstrikes threatens to further undermine Assad's claim that he is the leader of the hard-line anti-Israel camp. By threatening reprisals for future attacks and sending a militant group into the fray, the regime seemed to be trying to lessen the embarrassment of not acting now.

The PFLP-GC carried out several attacks in Israel in the 1970s, but largely faded away after a deadly 1987 raid of an Israeli army base by a guerrilla who swooped in on a hang glider.

Boaz Ganor, an Israeli counterterrorism expert, said the obscure group could pose a renewed risk because it can get regime weapons, additional men and training for attacks, such as firing rockets into the Golan or hitting Israeli targets abroad.

Assad ally Hezbollah has been linked to a number of such attacks on foreign soil, seen as retaliation for the 2008 assassination of its military commander in an explosion in Damascus blamed on Israel. One of the deadliest attacks with suspected Hezbollah involvement was a 2012 bus bombing that killed five Israeli tourists in Bulgaria.

Other targets have included Israeli embassies in eastern Europe and Asia, though several attacks failed.

Since the weekend, Israel has tightened security at embassies overseas and moved two more anti-missile batteries toward its northern border with Lebanon. Israel also briefly closed the airspace over northern Israel to civilian flights Sunday, but reopened flight paths Monday.

Gen. Masoud Jazayeri, assistant to the Iranian chief of staff, hinted Monday that Hezbollah might take the lead, saying "the resistance," a term for Hezbollah, "will retaliate for the Israeli aggression against Syria."

Ganor said Hezbollah might renew efforts to hit Jewish or Israeli targets abroad.

Yet the Shiite Muslim militia has strong reasons not to seek a full-on confrontation with Israel.

The two sides fought a war in 2006 that ended in a stalemate but also damaged much of Hezbollah's infrastructure in Lebanon and Shiite villages and neighborhoods.

Hezbollah could have difficulty explaining to its Shiite constituents why it's worth getting into another devastating fight with Israel over Syria, Saab said.

"Can Hezbollah launch something against Israel? I don't think so," said Saab.

___

Karin Laub has covered Israel, the Palestinian territories and the region since 1987.

___

Associated Press writer Diaa Hadid in Jerusalem contributed.

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Analysis: Iran's unlikely al Qaeda ties: fluid, murky and deteriorating

By Myra MacDonald

LONDON (Reuters) - When al Qaeda leader Ayman al-Zawahiri spoke in an audio message broadcast to supporters earlier this month, he had harsh words for Iran. Its true face, he said, had been unmasked by its support for Syrian President Bashar al-Assad against fighters loyal to al Qaeda.

Yet it is symptomatic of the peculiar relationship between Tehran and al Qaeda that in the same month Canadian police would accuse "al Qaeda elements in Iran" of backing a plot to derail a passenger train.

Shi'ite Muslim Iran and strict Sunni militant group al Qaeda are natural enemies on either side of the Muslim world's great sectarian divide.

Yet intelligence veterans say that Iran, in pursuing its own ends, has in the past taken advantage of al Qaeda fighters' need to shelter or pass through its territory. It is a murky relationship that has been fluid and, say some in the intelligence community, has deteriorated in recent years.

"I wouldn't even call it a marriage of convenience. It's an association of convenience," said Richard Barrett, former head of counter-terrorism for Britain's MI6 Secret Intelligence Service and later head of the U.N. Security Council's monitoring team maintaining the world body's al Qaeda and Taliban sanctions blacklists.

"It's not a strategic alliance. An al Qaeda presence may suit the Iranians because it allows them to keep an eye on them, it gives them leverage in the form of people who are akin to hostages," he added.

"There has been a lot of travel between Iraq and Pakistan and I cannot imagine the Iranians are not aware of that," he said. But it was unlikely that Iran would take the risk of actively collaborating with al Qaeda against North America: "I don't think the Iranians would take it kindly if it turned out that there had been plotting by al Qaeda on their territory."

Canadian police have said there was no sign the plot had been sponsored by the Iranian state. Iranian Foreign Ministry spokesman Ramin Mehmanparast said al Qaeda's beliefs were in no way consistent with Tehran's.

As yet, many details of the alleged plot remain unclear. However, a U.S. government source cited a network of al Qaeda fixers based in the Iranian city of Zahedan, close to the borders of both Pakistan and Afghanistan.

The source said they served as go-betweens, travel agents and financial intermediaries for al Qaeda operatives and cells operating in Pakistan and moving through the area.

Another Western source suggested that with relations deteriorating between Iran and al Qaeda over the civil war in Syria, Tehran had acted recently to stop fighters crossing through from Pakistan's Federally Administered Tribal Areas (FATA) to join Islamist militants fighting to overthrow Assad.

"Although the relationship between Iran and Al Qaeda has always been strained, this worsened after 2011 when the two sides lined up on opposite sides in the Syrian civil war," said Shashank Joshi, a researcher at the Royal United Services Institute think-tank in London.

"Syria's strongest rebel group is allied to Al Qaeda, and both have sharply criticized Iranian support for the Assad regime."

It is unclear whether the planning for the alleged Canadian plot, which Canadian police said had been in the works for some time, was carried out before Syria's war deepened the strain between Tehran and al Qaeda.

"There has been a loosening of the ties," said Barrett, noting that documents released after U.S. forces caught and killed Osama bin Laden in Pakistan in 2011 showed the al Qaeda leader saying he was not able to trust the Iranians at all.

"Since then we have Zawahri castigating Iran quite recently. So clearly something had gone wrong."

IRANIAN CONTROL FAR FROM CLEAR

If indeed the al Qaeda network was based in and around Zahedan - which lies on the main road to Pakistan and is the capital of Sistan-Baluchestan province - it is far from clear how easy it would be for Iran to control.

The region is home to a toxic mix of drug smuggling, illicit trade and gun-running by insurgents. Afghan refugees long ago crowded into poor neighborhoods on the outskirts of Zahedan, although Iran, like Pakistan, periodically tries to push them out, arguing they are a security risk.

Iranian authorities have also been battling a Sunni insurgency of their own in recent years by ethnic Baloch complaining of discrimination. The Jundollah group has claimed several attacks including a bombing that killed 42 people in 2009 - there is no sign it is linked to al Qaeda, though it is often confused with a Pakistan-based group of the same name.

At the same time, on the Pakistan side of the border, Pakistani security forces are fighting an insurgency by secular Baloch separatists, while al-Qaeda linked militants in the Sunni sectarian Lashkar-e-Jhangvi group have carried out a string of attacks against the Shi'ite population there.

PRAGMATIC APPROACH

Despite a common Western misconception that Iran, as the pre-eminent Shi'ite power, is motivated by religion, it has always been much more pragmatic in pursuing its national interest, analysts and diplomats say, allowing it to turn a blind eye to Sunni al Qaeda using its territory.

"The thing that has stymied people is that ‘al Qaeda is Sunni and the rest of the people we are talking about here are Shia. They don't mix and match.' Well, they do. And they do it whenever they want to. They just look the other way," said Nick Pratt, a retired U.S. Marines colonel and CIA officer now with the George C. Marshall European Center for Security Studies.

Before the U.S.-led invasion of Afghanistan in 2001, Iran cooperated with India and Russia against the Pakistan-backed Taliban then in power in Kabul. When al Qaeda members fled Afghanistan after the overthrow of the Taliban, it detained them under house arrest in Tehran.

"Since 9/11 a number of senior al Qaeda figures including one of Osama bin Laden's sons and senior commander and strategist Saif al Adel made their way to Iran," said Nigel Inkster, former director of operations for Britain's MI6.

"They were detained under quite strict conditions by the Iranian authorities who subsequently sought to use them as a bargaining chip with the US government in their ongoing dispute about Iran's nuclear program," added Inkster, who is now director of Transnational Threats and Political Risk at the International Institute for Strategic Studies.

Vahid Brown, a U.S.-based researcher who has written extensively on al Qaeda, said in an article on the Jihadica website earlier this year that the men who fled to Iran constituted a dissident faction within al Qaeda, which in recent years had become increasingly vocal in their criticism of bin Laden and Zawahiri.

Divided by their views on the advisability of the September 11, 2001 attacks on the United States, broadly speaking, "the pro-9/11 group, including bin Laden and Zawahiri, fled to Pakistan, while the anti-9/11 group ended up in Iran, where they were placed under house arrest by Iranian authorities," he wrote.

Iran had been willing to cooperate with the United States on Afghanistan initially, but relations soured after Tehran was denounced by then President George W. Bush as part of the "axis of evil" in 2002 and worsened further after the U.S.-led invasion of Iraq in 2003.

Later, analysts say, Tehran allowed al Qaeda members - among them al Qaeda in Iraq leader Abu Musab al-Zarqawi - to transit through Iran.

But Iran has been vulnerable to al Qaeda as well. After one of its diplomats was kidnapped in Pakistan some years ago it released some of the al Qaeda members it had under house arrest in exchange for his freedom, according to Pakistani media reports.

"About 18 months ago the Iranians released most if not all of those they were holding, for reasons still not entirely clear," said Inkster.

"There may well be a residual AQ presence in Iran though I would be cautious about presenting it as something very structured or hierarchic," he added.

"AQ is far from being the organization it once was and what matters more are relationships between like-minded individuals. And that may well be what we are seeing in the Canada case. There seems to be no evidence of Iranian official involvement."

(Editing by Peter Graff)

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Analysis: Meet North Korea's new Kim, same as the old Kims?

By Matt Spetalnick and Mark Hosenball

WASHINGTON (Reuters) - North Korea's young leader Kim Jong-un is using his forebears' time-tested "crazy-guy-in-the-neighborhood" strategy, senior U.S. officials say, but with a provocative new twist - aiming Pyongyang's threats directly at the United States.

There are indeed signs of an earlier method in what might seem like Kim's rhetorical madness, which U.S. policymakers say is patterned after more than a half century of rule over the reclusive state by his father and grandfather.

But with a large degree of uncertainty surrounding Kim and limited U.S. intelligence on North Korea's leadership, Washington is still trying to gauge how far the untested 30-year old leader might go to prove himself to his people, and his generals, or to make a belligerent point to South Korea's new president and the world.

North Korea's surprise announcement on Tuesday of plans to restart a long-shuttered nuclear reactor, while not issued by Kim personally, could further raise the stakes in his standoff with the West.

"All bets are off on whether this guy recognizes where the off-ramps are," one senior administration official said. "We don't have enough history with him to know whether or not he has the sophistication that his father displayed in dealing with diplomatic confrontation."

This official and others spoke on condition of anonymity to discuss months of North Korean threats and actions, including missile and nuclear tests, that pose a challenge to President Barack Obama's policy of "strategic patience" toward Pyongyang.

That policy - a refusal to offer new incentives to Pyongyang until it suspends its disputed nuclear program - has yielded little but defiance since Obama took office in 2009.

Joseph DiTrani, formerly the U.S. intelligence community's top expert on North Korea, said the "cadence change" displayed by Kim's tough talk and military gestures, such as this year's nuclear test, indicate he is under heavy pressure from the country's military elite.

"He's got to present (an image of) ... strength to those elements," DiTrani said.

NO CAUSE FOR ALARM?

Though Kim has fired or demoted some generals since taking power, Pyongyang's military leadership remains a political force to be reckoned with.

He has sought to placate them by paying homage to the "Military First," or Songun, philosophy his late father, Kim Jong-il, preached to justify use of impoverished North Korea's scarce resources to build a 1.2 million-strong army and a nuclear weapons program, Asia experts say.

Still, the Obama administration insists there is no cause for alarm.

Pyongyang's assertion over the weekend that it had entered a "state of war" with South Korea over its joint military drills with the United States, has not led to corresponding movements of North Korean forces, the White House said.

And while Pyongyang's bluster may be unsettling, images of Kim posing in front of maps portraying missile targets on the U.S. mainland require a stretch of the imagination, given that North Korea has yet to prove it has mastered ballistic technology capable of reaching American shores.

U.S. officials insist they are anything but nostalgic for Kim Jong-il, who was seen by Washington as dangerous though at least predictable. He issued threats and even acted militarily to get the world's attention but would draw the line at open armed conflict, using crises he provoked as leverage in international negotiations.

The younger Kim, little known to the West when he took power in December 2011, appears intent on stretching the limits of his family's playbook. He has taken the spotlight not only to issue some threats in person but has gone a step further, hurling them at his country's superpower foe.

"There are clear differences in style and tone (between father and son)," another senior U.S. official said. "He is much more personally involved in the forefront ... and these threats are more specific and more directly oriented at the United States this time around."

But this official insisted that even with this new variation of what he called North Korea's "crazy man strategy," Kim would not succeed in getting Washington and its allies to "buy them off" with aid, fuel or other concessions, as previous U.S. administrations have periodically tried to do.

Obama himself offered food aid to North Korea last year, under stringent monitoring terms to ensure it wouldn't be diverted to the military, in return for a moratorium on nuclear and long-range missile tests. The deal imploded less than three weeks later when Pyongyang announced plans for what it called a satellite launch and U.S. officials said was a missile test.

TARGETING DOMESTIC AUDIENCE

Some U.S. officials believe Pyongyang's bellicosity is aimed primarily at a domestic audience.

They see Kim trying to keep his vast, poorly paid army motivated with anti-U.S. propaganda and improve his status among North Korea's largely dirt poor population by standing up to foreign enemies, even as he seeks to cement his grip on power.

But there is growing concern that Kim's inexperience coupled with his drive to prove himself could lead to a limited strike on a South Korean target, such as a ship or border post, or that the two sides could stumble into military confrontation.

"The greater likelihood is miscalculation," former U.S. Defense Secretary Leon Panetta told CNBC on Monday. "And if they do something that escalates quickly, that's the greater danger."

U.S. officials and independent Korea watchers alike acknowledge, however, they are so short on personal information about Kim that predicting his behavior remains a guessing game.

The Obama administration's original hopes that Kim would turn out to be a reformer have yet to materialize and seem unlikely to any time soon, U.S. officials say.

Despite that, most Korea watchers believe Kim is a rational actor who understands his military is no match for Seoul and its U.S. ally and that straying too far from historic North Korean practices could jeopardize his own political survival.

Kim dialed down the harsh rhetoric in his latest speech this week when he avoided repeating recent threats to attack South Korea and the United States.

And he has occasionally tried to project a warmer image. Weeks after ordering an internationally banned nuclear explosion, he indulged his passion for basketball by hosting former NBA star Dennis Rodman.

"An awesome kid," said Rodman, who has now spent more time with Kim than any Western officials ever have.

(Additional reporting by; Arshad Mohammed and Phil Stewart in Washington and David Chance in Seoul; Editing by Warren Strobel and Todd Eastham)

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Analysis: Supreme Court energizes gay rights even as it resists

By Joan Biskupic

WASHINGTON (Reuters) - After two days of Supreme Court arguments over same-sex marriage, the United States may be left with this irony: While the high court is not likely to alter the constitutional landscape for gays, the justices nevertheless have provided a rallying point for the gay-rights cause.

Three major legal outcomes appeared likely as the justices on Wednesday ended the second dramatic day of arguments in the most closely watched dispute of their current term:

* The court would not rule that gay people need special constitutional protection from discrimination.

* The court would not declare a nationwide right to same-sex marriage.

* At the same time, a majority would rule narrowly that the federal government must provide married same-sex couples the same benefits it gives their heterosexual counterparts.

Yet just as the nine black-robed justices made clear that they did not wish to play a leading role in the national conversation about same-sex marriage, they showed they could nonetheless raise its volume. Simply by agreeing to hear the two disputes - one over California's ban on same-sex marriage, the other over the federal law denying benefits to same-sex couples - the justices energized the debate.

Numerous public figures including former President Bill Clinton, who in 1996 signed the law forbidding same-sex couples from obtaining federal benefits, and prominent groups including the American Academy of Pediatrics in recent weeks came out vigorously in support of same-sex marriage and gay civil rights.

Individual members of Congress - Democrats and Republicans - suddenly voiced new support for gay marriage.

Perhaps most dramatically, Senator Rob Portman of Ohio, considered a possible future Republican presidential contender, earlier this month announced he was reversing his opposition to such same-sex marriage, citing the fact that his son two years earlier had told him he was gay.

Opponents of gay marriage have not witnessed any similar high-profile testimonials from people who were switching to their side. Recent opinion polls, taken in association with the Supreme Court's decision to take up the gay-marriage cases, have documented a surge in public support for same-sex unions.

The new cases also pushed the Obama administration to break new legal ground.

President Barack Obama had personally endorsed gay marriage but he had long asserted that same-sex marriage was a matter for the states to handle. At the last minute, however, his administration decided to enter the California dispute and argue that federal guarantees of constitutional equality forbid states from limiting marriage to heterosexuals.

The administration also contended that gays deserve extra constitutional protection from bias, as the Supreme Court has afforded women fighting sex discrimination.

Yet as much as the justices effectively propelled others to take a stand, they showed by their own comments and questions from the bench this week that they do not intend to be at the vanguard.

The lawyers who appeared on Tuesday and Wednesday were passionate in their presentations, yet none seemed to seize the justices and generate equal fervor.

To be sure, there were moments of excitement, including some sharp exchanges between lawyers and individual justices such as when Justice Elena Kagan challenged an attorney's assertion that government's overriding interest in marriage relates to procreation and childbearing.

'UNCHARTED WATERS'

There was also the suspense of what swing-vote Justice Anthony Kennedy might say. Kennedy sent conflicting messages at times, expressing concern about the children of gay parents who cannot marry but then suggesting the justices should be wise to stay out of "uncharted waters" on the issue.

There were moments of tedium, too, as the justices wrestled with procedural issues that could prevent them from deciding the merits of either case.

Such hurdles would likely prevent any decision on California's Proposition 8, the 2008 ballot initiative that defines marriage as only between a man and a woman. A majority of the justices signaled they might not reach the merits, most likely because California state officials have declined to defend the law and Proposition 8 backers may lack "legal standing" in the case.

A court majority most certainly would not conclude - as the challengers to Proposition 8 argued on Tuesday - that all 50 U.S. states must allow same-sex marriage. Currently nine states permit such marriages, along with Washington, D.C.

Nothing that emerged in oral arguments on Wednesday over a provision of the 1996 Defense of Marriage Act (DOMA) would suggest that the justices had any second thoughts about delving into the larger issues of gay marriage. In fact, their comments reinforced the notion that a majority on the generally conservative court is not ready to carve out new rights for gays.

The Obama administration and other challengers to DOMA had urged the court to declare that government rules tied to sexual orientation deserve "heightened" scrutiny, meaning that the government needs an exceedingly persuasive justification for the regulation.

If the court were to adopt such a level of constitutional protection for gays, as it has in the gender-discrimination context, bans on same-sex marriage would be legally undermined. But that proposition for tougher judicial scrutiny in gay-bias cases gained no traction at the Supreme Court.

Chief Justice John Roberts suggested that the national activity surrounding this week's cases might have demonstrated that gays are, in fact, a political force in no need of special protection.

"As far as I can tell, political figures are falling over themselves to endorse your side of the case," Roberts told lawyer Roberta Kaplan, who was representing a New York woman denied a federal estate-tax exemption because her spouse was another woman, not a man.

Roberts may have been referring to national figures including Portman whose endorsement of gay marriage coincided with the court's consideration of the matter.

In the same vein, a record number of "friend of the court" briefs were submitted in the paired cases, most favoring gay rights. In yet another unusual move, marking one of corporate America's most high-profile efforts on same-sex marriage, close to 300 businesses urged the court to strike down the DOMA restriction. (Thomson Reuters Corp, which owns Reuters, was among them.)

Outside the marble-columned Supreme Court building, demonstrators rallying for gay marriage dominated the scene.

So no matter how this court ultimately rules - a decision is expected by late June - it seems clear that the justices' mere involvement was a boost to the gay-rights cause, at least in the court of public opinion.

(Reporting by Joan Biskupic; Editing by Eric Effron and Will Dunham)

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Analysis: Supreme Court seems poised to avoid same-sex marriage tide

By Joan Biskupic

WASHINGTON (Reuters) - For nearly four years, proponents of same-sex marriage have been strategically building a test case aimed at convincing the conservative-leaning Supreme Court to declare that gay marriage is a constitutional right. The advocates felt they were ready.

But on Tuesday, after an intense, wide-ranging hearing, it appeared the justices were not.

Over the course of the 80-minute session, it seemed that for the array of gay rights supporters across the country, neither their greatest hopes nor worst fears would be realized.

A majority of the justices suggested by their comments and questions that they were not prepared to rule on whether a fundamental right exists for gays and lesbians to marry. Some justices even suggested that the specific case before them, testing the validity of a 2008 California ballot initiative that defined marriage as only between a man and woman, might not be resolved on the merits.

The justices return to the bench on Wednesday for the narrower question of whether the federal government may deny benefits to married same-sex couples that are allowed their opposite-sex counterparts.

The court has several options on how it might resolve that case, from a finding that the Republican-dominated congressional group defending the law lacks "legal standing," resulting in dismissal, to a decision striking down the provision and robustly declaring that all laws tied to sexual orientation deserve tough judicial scrutiny.

That latter stance could eventually pave the way for gay marriage laws nationwide, well beyond the nine states and District of Columbia that now allow it. But from the tone of arguments on Tuesday, a majority would likely resist that route.

Justices across the ideological spectrum suggested they wanted to tread a cautious path in the cases that have become the most closely watched of the term.

The white marble and crimson velvet courtroom was crowded with nearly 400 spectators, some of whom had waited since last Thursday, in snow and rain, for seats. The paired cases have drawn a record number of "friend of the court" briefs and become the occasion for near daily declarations in support of gay marriage from public figures and prominent organizations.

'UNCHARTED WATERS'

Yet the justices do not seem ready for a role on centerstage in the matter. Justice Sonia Sotomayor, a liberal, questioned whether the issue should percolate a little longer in the states. Justice Samuel Alito, a conservative, asserted that the notion of same-sex marriage was newer than today's ubiquitous cellphones and perhaps not ready for judicial intervention. And Justice Anthony Kennedy, the usual swing vote, likened the court's possible journey in the case to going into "uncharted waters" or even over "a cliff."

If the court avoids the looming question about a fundamental right, it could disappoint the two main lawyers pushing for same-sex marriage - Theodore Olson, who argued Tuesday, and David Boies, the legal partner who sat at his side. Yet, it would also mean that the worst-case scenario envisioned by other gay rights supporters would be avoided, too.

Their concern was certainly understandable. The Supreme Court's past cases on gay rights in narrower contexts, in 1996 and 2003, were vigorously fought. Four of the current nine justices are new to the gay rights issue. The bench is not as predictable as in the past, and overall, because Alito replaced Sandra Day O'Connor in 2006, the court may be more conservative on social policy.

So in May 2009, when Olson and Boies, former opponents from the 2000 presidential election case of Bush v. Gore, suddenly filed their challenge to Proposition 8, many gay rights activists and leaders expressed concern. Advocates who had been concentrating their efforts in the states worried that a federal case could backfire with a decision upholding Proposition 8 and declaring no constitutional right to same-sex marriage.

But that outcome now seems unlikely. While Supreme Court justices sometimes reverse course from the tone of arguments, it seems no major constitutional ruling will emerge from the California case of Hollingsworth v. Perry.

Justices on the right and left questioned whether proponents of Proposition 8, who took up its defense after California officials declined, have legal standing.

"Have we ever granted standing to proponents of ballot initiatives?" Justice Ruth Bader Ginsburg asked lawyer Charles Cooper, representing Proposition 8 supporters. Cooper said no but stressed that California's Supreme Court had ruled that under state law the backers of Proposition 8 should be allowed to defend it.

Chief Justice John Roberts voiced doubt, saying that "a state can't authorize anyone to proceed in federal court," because federal judges themselves determine who may bring claims.

LEGAL STANDING

Yet these questions of legal standing were in the case when the appeal from Proposition 8 supporters arrived on the Supreme Court's doorstep last year. And the court nonetheless took the appeal. It requires only four of the nine justices to accept a case for oral arguments; it takes five to resolve it.

Perhaps the thorny procedural hurdles became more obvious as the justices prepared for Tuesday's hearing. Or, perhaps that area might be the only one of common ground. There appeared to be no majority for either side's constitutional assertions.

Cooper argued that the states may limit marriage to heterosexual couples because of their interest in procreation and child rearing. Justice Elena Kagan, particularly, hammered at that notion, asking whether the court could block an older couple, possibly beyond their fertile years, from marrying.

Olson argued that Proposition 8 "walls off gays and lesbians from marriage," the most important relationship they might have. Roberts expressed doubt that California was plainly excluding a particular group. "When the institution of marriage developed historically, people didn't get around and say 'let's have this institution, but let's keep out homosexuals.' The institution developed to serve purposes that, by their nature, didn't include homosexual couples."

Justice Antonin Scalia, who has been the most outspoken opponent of gay rights on this court, challenged Olson to say exactly when same-sex marriage became the constitutional norm.

Olson could not but rather asserted: "It was constitutional when we as a culture determined that sexual orientation is a characteristic of individuals that they cannot control. There is no specific date in time. This is an evolutionary cycle."

(Reporting by Joan Biskupic; Editing by Eric Effron and Eric Beech)

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AP Analysis: In Mideast, partial deal tantalizes

JERUSALEM (AP) — As the U.S. president prepares to reinsert himself in the Israeli-Palestinian conflict, his best hope may be to set aside grand hopes for a final agreement and make do with a partial deal.

An interim settlement would leave neither side with full satisfaction, and the Palestinians in particular strongly oppose it for fear that it will become permanent. But with gaps seemingly unbridgeable on the same key issues that have scuttled all previous peace efforts, a piecemeal approach may be just enough to yield a sovereign Palestinian state, albeit an imperfect one.

Barack Obama heads to the region Wednesday in a long-awaited trip whose agenda includes hopes of restarting negotiations. The White House has been careful to lower expectations, saying Obama will mainly listen and learn as he speaks to Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas.

But U.S. officials confirm the idea of an interim agreement, while not their preference, has been under consideration. One U.S. official, who spoke on condition of anonymity because he wasn't authorized to speak publicly on the matter, said new Secretary of State John Kerry "is looking for options on a way forward" and that an interim arrangement has been among several ideas being explored.

"The challenge of diplomacy is to try and find areas where progress can be made, and not always try and seek a complete solution when one is not in the cards at present," said Dore Gold, a former Israeli ambassador to the U.N. who has served as an informal adviser to Netanyahu.

Netanyahu's new government, which was inaugurated this week, includes key moderate partners that want movement on the Palestinian front and can bring down the government if they choose.

The Palestinians will be a hard sell. They want a state in all of the West Bank, east Jerusalem and the Gaza Strip, territories captured by Israel in the 1967 Mideast war. From their perspective to suffice with that territory — leaving Israel with over three-quarters of what was British-ruled Palestine until 1948 — is compromise enough.

"If Israel was serious it would have offered a solution based on the two states, but Israel wants to annex Jerusalem and large parts of the West Bank by such an offer," said Ahmad Majdalani, a member of the executive committee of the Palestine Liberation Organization.

Previous peace talks under more dovish governments all broke down despite offers that Israelis think should have come close. No serious negotiations have taken place in the past four years, since Netanyahu returned to power.

Netanyahu opposes a full pullout from the West Bank because it is a strategic highland, and to many Jews it's their biblical heartland to boot. Complicating things are 300,000-odd Jewish settlers preventing a clean pullout.

He also chafes at giving up any of east Jerusalem, which Israel has annexed, expanded, and populated with another 200,000 Jews, declaring it an indivisible part of its capital — an idea generallyl rejected by the world community and the Palestinians who also claim east Jerusalem as the capital of their future state.

East Jerusalem also contains the combustible Old City, walled home to sensitive Jewish, Muslim and Christian holy sites; giving it up would be excruciating for either side.

Jerusalem mayor Nir Barkat speaks for many when he argues that Jerusalem can no longer be divided on practical grounds: the communities are too mixed and any effort to draw a border would yield a map so bizarre as to defy implementation. Sharing control seems even more far-fetched; free entry for Palestinians from the adjoining West Bank into a shared city would suggest potential free further passage to the rest of Israel — yet Israel is determined to keep most Palestinians out as a security threat.

Further clouding the picture, the Palestinians demand the "right of return" of millions of refugees and descendants, whose families lost properties in what is now Israel. Israel rejects this out of hand, saying a mass influx would spell the end of the country.

And in a final complication, Hamas militants have controlled the coastal Gaza Strip since overrunning Abbas' forces in 2007, two years after Israel withdrew troops and settlers from there unilaterally. The Islamic militant group rejects peace with Israel, and efforts to reconcile with Abbas' rival government in the West Bank have repeatedly failed.

The landscape seems hopeless. But time is also working against both sides in different ways.

For Israel, a failure to divide the Holy Land into two states seems to be national suicide since the fast-growing Arab population in the area could soon outnumber Jews. If Gaza is included in the equation parity at about 6 million each looms even today; Palestinians argue that Gaza remains occupied because Israel controls its sea access and airspace and blockades most of its land border. Most Israelis, including the hard-line Netanyahu, acknowledge the status quo endangers Israel as a democracy with a solid Jewish majority.

For Palestinians, their dream of a state grows ever more distant as Israel continues to settle the West Bank and east Jerusalem with Jews. Although they increasingly wave the "binational state" threat as a default outcome of inaction, with its implications of the future demographic destruction of Israel, Palestinian leaders do seem to genuinely prefer the two-state option still possible — if barely — now.

A partial deal could provide relief for both sides. By decisively extricating itself from large parts of the West Bank, Israel would greatly diminish the demographic threat and blunt international criticism. The Palestinians would gain independence over much of the land they seek without having to drop their claims over east Jerusalem and refugees. What to do with Gaza could be left aside, along with Jerusalem, for a future final agreement.

Netanyahu, who won re-election by a whisker in January, has said his new government will make a renewed push for peace, though he has given no indication of how.

His new chief negotiator, dovish Justice Minister Tzipi Livni, told a security conference last week that while a final agreement must remain the goal, "I do definitely think that we need to think about additional possibilities in case we won't be able to end (the conflict), because a situation with a lack of a solution is unacceptable."

While Netanyahu's government is filled with hard-liners who reject any significant concessions to the Palestinians, he also could expect support from some prominent voices. Netanyahu's largest partner, Finance Minister Yair Lapid's Yesh Atid Party, has also demanded a serious peace push.

Silvan Shalom, a Cabinet minister in Netanyahu's Likud Party, voiced support for a provisional agreement. "Our goal is to reach an agreement (even) if it is in stages," he told Israel Radio Tuesday.

Israeli opposition leader Shelly Yachimovich, a fierce opponent of Netanyahu, said she would "seriously reconsider" joining his government if a temporary deal is reached.

Yossi Beilin, a former Israeli Cabinet minister who negotiated the interim peace accords with the Palestinians in the 1990s that created the autonomous Palestinian Authority, said another partial accord would make sense now. He noted that the "Road Map," a U.S.-led peace initiative from a decade ago, called for a Palestinian state with provisional borders in its second phase while the stickiest issues were worked out.

"The practical offer that America can bring to the table, and this is what I really hope Obama will bring tomorrow, is an attempt to help both of the sides to seriously check the realization of the second stage of the Road Map," he said.

Beilin said he has discussed this idea with Netanyahu and Abbas in recent months, and both were open to the idea.

"Mahmoud Abbas said he would be ready for something like this under two conditions. The first condition is that he will receive the vision of the final agreement ... and the second thing is that he receives the timetable until a final agreement. Obama can provide both those things in my opinion," Beilin said.

A Palestinian official who was present during the meeting confirmed the conversation had taken place but could not say whether Abbas was in agreement. He spoke on condition of anonymity because he was not authorized to reveal details of their meeting to the press.

In the end, it may come down to just how much land the Palestinians are offered as enticement — but for now the skepticism is strong.

Majed Swailim, a Palestinian political scientist, said "no one can accept" an interim solution that falls short of their remaining demands. The final result, he warned, will a single state of Israelis and Palestinians who do not want to live together.

___

Dan Perry has covered the Mideast since the 1990s and currently leads AP's coverage in the region. Follow him at twitter.com/perry_dan

Josef Federman is the Associated Press News Editor for Israel and the Palestinian territories. Follow him at twitter.com/joseffederman.

___

Associated Press writer Tia Goldenberg contributed to this report.

An AP News Analysis

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Analysis: Afghan security vacuum feared along "gateway to Kabul"

By Mirwais Harooni and Michael Georgy

MAIDAN SHAHR, Afghanistan (Reuters) - The Afghan policeman manning a checkpoint glances at the snow-covered mountains that are home to Taliban fighters and predicts what would happen if elite U.S. forces leave Wardak province, seen as the gateway to the capital of Kabul.

"The Taliban will take over in one day," Mohammad Jamil says. "They are nearby."

Ever since President Hamid Karzai announced late last month that U.S. forces would be barred from the strategic province because of alleged abuses against civilians, Afghan forces who will be left to provide security without them have grown more anxious by the day.

Wardak, just a 40-minute drive from Kabul, is a prime example of what could happen in other parts of Afghanistan as the United States winds down an increasingly unpopular war, now in its 12th year.

U.S. special forces are expected to play a major role after most NATO combat troops withdraw by the end of 2014, and Karzai's decision could complicate negotiations between the United States and Afghanistan over the scope of U.S. operations after the pull-out.

"It's special forces who go usually on the front lines and fight with Taliban," said a second Afghan policeman, Mir Hussain. "If we make them leave this province than there won't be anybody to fight them. It's obvious that as soon as they leave our province the Taliban will return to power here."

Strategically located astride the Western approach to Kabul, Wardak is ideally placed for the insurgents who control nearby mountain villages to use as a staging ground for suicide operations into the city, home to nearly 5 million people and dozens of diplomatic missions.

Militants already carry out ambushes, shooting attacks and suicide bombings on American and Afghan forces there.

Fears that the departures of U.S. special forces will embolden the insurgents are heightened by the arrival of spring, which traditionally marks the start of Afghanistan's "fighting season" as the snow melts.

Earlier this week, two U.S. soldiers, reported to be special forces, were killed in an attack in the province.

LOVE-HATE RELATIONSHIP

Karzai ordered U.S. special forces to leave after residents complained that they, and Afghans working with them, were torturing and killing civilians, an allegation strongly denied by the Americans.

Even after the deadline for U.S. special forces to withdraw passed on Sunday, General Abdul Razaq, a senior police detective, told Reuters they were still in Wardak, a collection of mostly apple and apricot farms surrounded by mountains.

U.S. forces have refused to comment on their deployment.

Razaq said local officials had urged the Interior Ministry to provide strong support if the American forces leave, including artillery and reinforcements.

Some residents speak with hatred about the elite U.S. forces and believe allegations that they committed atrocities.

"Every day they kill our innocent people," said Abdul Ghafoor, 54, without offering any evidence to back the accusations, as his companions nodded in agreement.

But others seem far more worried about the security vacuum the province may face. Many remember how Wardak was the launching pad for the Taliban when they took over Kabul and much of the country in 1996.

They don't have to look far. Collapsed buildings, including one that served as a coordination center for security forces, are a potent reminder of the devastation wreaked by Taliban suicide bombings.

"A small number of people from Wardak province had complained to President Karzai about special forces but now they also know that their decision wasn't right," said Hameeda Akbari, a member of parliament from Wardak.

"They want to find a way to solve the problem and keep special forces for some more time. If special forces leave Wardak, the security situation will get worse."

KABUL RISK HEIGHTENS

Some fear the dangers could reach far beyond the provincial capital of Maidan Shahr, where Afghan policemen speed past a children's playground called Peace Park in jeeps mounted with machine guns.

"As soon as these forces leave this province not only Wardak, but even some parts of Kabul, will be occupied by Taliban and Kabul security will be in danger," said Haji Rokai, a tribal elder. "So I hope that the government takes a better decision and keep these forces here for longer period."

Afghan Army Chief of Staff Sher Mohammad Karimi recently told Reuters most of the suicide attacks in Kabul were planned just 25 km (15 miles) away in Wardak.

"It is one of our biggest concerns," he said.

Jittery Afghan forces have set up a multitude of checkpoints along Maidan Shahr's two paved roads. Intelligence agents, police and soldiers stop and question motorists travelling on potholed, dusty streets.

"We got a tip-off that the Taliban were sending a suicide bomber here today to carry out a mission," said an Afghan intelligence agent who checked vehicles.

LIVING IN FEAR

It is not only the Taliban who are waiting to attack. The al Qaeda-linked Haqqani network, believed to be the United States' deadliest foe in Afghanistan, and other insurgent groups like Hizb-i-Islami, led by Gulbuddin Hekmatyar, are also active.

In 2011, on the 10th anniversary of the September 11 attacks on the United States, a truck bomb in Wardak wounded 77 American soldiers. A month earlier, the Taliban shot down a transport helicopter in Wardak, killing all 38 people on board, including 25 U.S. special forces.

The Taliban haven't lost their edge despite the presence of U.S. special forces and their intimidating Afghan partners, who ride off-road motorbikes and cover their faces with balaclavas and dark sunglasses.

Afghan security forces, already at a disadvantage because they lack training and equipment, could become less effective if the Americans leave.

"We have five PK light machine guns in our whole district, but the Taliban has more than five in a small checkpoint. So how can we fight with them or protect our people from their atrocities?" asked the policeman Jamil.

He recalls the consequences of a U.S. withdrawal from a nearby district, Sayedabad. "The Taliban captured that valley. Now it's a training camp for them where they learn how to attack Afghan and foreign forces."

Provincial officials are not taking any chances. Many of them refuse to spend the night in Wardak for fear of attacks by militants.

"It is a 15-minute drive from my office to my house but I cannot go there," said Esmatullah Asem, head of Maidan Shahr Hospital. "The last time I went home was two years ago. I live in Kabul."

(Writing by Michael Georgy; Editing by Jeremy Laurence and Alex Richardson)

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Analysis: Behind North Korea bluster, a record of troubling actions

WASHINGTON (Reuters) - North Korea's blood-curdling war threats are often dismissed as the kind of over-the-top rhetoric the world expects from the reclusive and eccentric leadership in Pyongyang, now in its third generation under Kim Jong-un.

But while the latest threat to launch a "pre-emptive nuclear strike" on the United States is believed by experts to be beyond North Korea's technical capacities, and would be suicidal, history shows there can be bite behind Pyongyang's bark.

"This kind of extreme rhetoric has not been unusual for this regime, unfortunately," State Department spokeswoman Victoria Nuland said on Thursday, adding the United States could defend itself and allies Japan and South Korea in any event.

Asked if the deterrence talk meant that Washington sensed more than bombast, she added, "You have to take a government at its word when it makes these kinds of threats."

Thursday's threat, issued as a statement from North's Foreign Ministry spokesman, came during U.S.-led efforts to pass new U.N. sanctions on North Korea in response to its most recent nuclear test. The Security Council later approved the sanctions.

When it comes to actions welcomed by the United States and its allies, taking Pyongyang at its word is nearly impossible. Twenty years of nuclear diplomacy is littered with broken pledges, dashed deals and a small but growing North Korean nuclear arsenal.

South Korea, likewise, has little to show for hundreds of millions of dollars of aid it sent northward after Seoul and Pyongyang signed a raft of bilateral agreements at their historic June 2001 leaders' summit.

But when it comes to threats of bad behavior, North Korea has a better record of delivering - beginning with the three nuclear tests it carried out in 2006, 2009 and last month in the face of strong international warnings to desist.

The 2009 and 2013 tests defied U.N. sanctions forbidding such tests.

NO 'SEA OF FIRE,' BUT DEADLY ATTACKS

Bruce Klingner, a retired North Korea analyst for the CIA, said Pyongyang, through its Korea Central News Agency mouthpiece, often repeated threats "which are bombastic and seem to indicate impending military attacks that then don't occur."

South Koreans and their financial markets long ago learned to shrug off North Korea's most infamous and lurid threat, to turn Seoul into a "sea of fire."

This week's pre-emptive nuclear attack rhetoric appeared intended to intimidate South Korea, the United States and China, said experts and a U.S. official.

"A lot of it is just their classical reaction to the fact that the international community increasingly is coming together and making it tougher for them to operate - that's the kind of acting out that we often see from North Korea," Glyn Davies, U.S. special representative for North Korea, told a Senate hearing on Thursday.

If the North's aim was to goad Washington back into nuclear talks, it misfired, said Matt Stumpf, Washington director of the Asia Society.

"If North Korea is using new threats to get the United States back to the negotiating table, it is missing how much opinion in Washington, Seoul, Tokyo and Beijing has changed through successive crises," Stumpf said. "This might have been a workable strategy in the past, but there will be little appetite to negotiate until North Korea shows it is committed to real change."

A U.S. Congressional Research Service study published after last month's nuclear test cited intelligence estimates that North Korea had enough separated plutonium for at least half a dozen nuclear weapons.

Carrying out the threat to attack the United States, is not possible, however, without warhead miniaturization, which, the report said, "would likely require additional nuclear and missile tests."

Klingner, now at the conservative Heritage Foundation think tank, warned that "we cannot easily dismiss North Korean threats, because they have often been carried out."

He cited the example of 2010, when after threats against South Korea and vilification of its then-president, Lee Myung-bak, North Korea lashed out in a pair of deadly attacks on a South Korean warship and an island, killing 50 people. North Korea denied responsibility for the ship's sinking.

"The conundrum has always been: Is a new North Korean threat one that will not be carried out, as frequently has been the case in the past, or is it a portent of upcoming action?" said Klingner.

(Editing by Warren Strobel and Peter Cooney)

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Analysis: EU needs "who lost Italy" debate on austerity

BRUSSELS (Reuters) - European policymakers should be asking themselves "who lost Italy" after a grassroots revolt against austerity, unemployment and the political elite caused an electoral earthquake in the euro zone's number three economy.

Instead, most are insisting that their policy mix to fight the currency area's debt crisis is right, even though the latest EU forecasts have pushed any prospect of meaningful economic recovery in southern Europe back into the middle distance.

A surge in support for anti-euro populist Beppe Grillo and the surprise resurrection of former Prime Minister Silvio Berlusconi on an anti-austerity platform in last week's election have plunged Rome into political deadlock.

Italy, which had been governed by respected technocrat Mario Monti for 15 months since Berlusconi's last government fell, is far from the worst affected by the three-year-old debt crisis.

Unemployment there stands at 11.7 percent, less than half the rate of Greece and Spain, where one of every two young people is without a job.

If a milder recession and less severe spending cuts and tax rises can cause such a social and electoral revolt in Italy, the risks of an explosion in Greece and Spain ought to be greater.

Yet the official reaction from Brussels and Frankfurt is to act as if nothing, or almost nothing, had happened.

"The crisis is not yet over and efforts must not be relaxed," European Commission President Jose Manuel Barroso said in a joint statement with Monti two days after the election.

At a Reuters Summit on the future of the euro zone, Barroso appealed to European leaders to stay the course and "not give in to populism". Despite the bleak growth forecasts, structural reforms were starting to bear fruit, he said.

Barroso reeled off figures showing current account deficits in Portugal, Spain, Italy and Greece were shrinking and Ireland was back in surplus. Exports from Spain and Portugal were rising and the labor competitiveness gap between northern and southern Europe was narrowing.

Those numbers have a flipside. Payments imbalances are down mostly because those countries' imports have shrunk due to sinking demand. The labor cost gap has declined largely due to mass layoffs in southern states rather than productivity gains.

Exports account for less than 20 percent of the Iberian countries' output, less than half Germany's ratio and too little to offer a fast track to recovery.

SOCIAL CRISIS

While the European Central Bank removed the danger of a financial meltdown of the euro zone with its bond-buying plan, there is now a growing risk of a social crisis that could lead to one or more southern countries leaving the currency area.

"I absolutely think it can get a lot worse," said Clemens Fuest, the incoming chief of Germany's respected ZEW economic research institute.

"There is really the current plausible scenario for a break-up of the currency union. It may very well be that in these countries at some point the population will say 'we don't believe things will get better'," he told the Reuters Summit.

The degree of despair would have to be high to risk leaving the euro area, "but if things continue, if unemployment goes up to 30 percent... in Spain, there certainly is a danger that might happen".

Zsolt Darvas of the Bruegel think-tank in Brussels said southern European countries were trapped in a downward spiral of economic contraction and rising debt for an unknown duration but had no alternative to fiscal consolidation.

The only way out was to alter Europe's fiscal policy mix by stimulating demand in northern Europe, notably with tax cuts in Germany, and giving the European Investment Bank a huge capital increase to lend to companies in southern Europe, he said.

Using the EIB to inject the equivalent of 2-3 percent of gross domestic product a year into south European economies for a limited number of years would be the most effective and politically feasible way to revive growth, Darvas said.

No such plans are under consideration in the European Union, and German, Dutch and Finnish voters remain deeply hostile to any fiscal transfers to southern Europe.

With Germany facing its own general election in September, followed by the usual period of coalition negotiations, it is hard to imagine any major policy shift this year.

EU growth initiatives so far have been on a far more modest scale, including a small boost to EIB capital last year and a recently created 6 billion euro youth employment fund due to take effect next January to support job training and mobility.

Monti warned repeatedly last year that anti-European populists would gain ground in the south unless the euro zone did more to support his efforts and those of Spanish Prime Minister Mariano Rajoy by bringing down borrowing costs.

Those costs did fall significantly after the ECB announced its bond-buying initiative in September, but Monti's appeal for more financial solidarity from Germany fell on deaf ears.

Whether his election debacle, after European leaders encouraged him to enter the race, will sway minds in the EU remains to be seen.

For the moment, their key priority is to help Ireland and Portugal return to capital markets later this year to demonstrate success for their bailout and adjustment programs.

French Finance Minister Pierre Moscovici, also speaking at the Reuters Summit, was one of the rare voices to say the Italian voter backlash showed that austerity had gone far enough and it was time to strengthen growth.

His German counterpart, Wolfgang Schaeuble, a leading advocate of austerity during the crisis, drew no such lesson, saying European policies were not to blame for greater inequality and economic divergence between north and south.

"We need to continue on this path, but we will have setbacks," Schaeuble said.

It may take another, bigger jolt than Italy's election to spur euro zone leaders to change course, if they ever do.

(Writing by Paul Taylor; Editing by Jeremy Gaunt)

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Analysis: China's next inner circle

HONG KONG (Reuters)-Even as Xi Jinping gets ready to assume the presidency of China this month, jockeying has begun for 2017 when rising stars of the ruling Communist Party move into top leadership posts.

China's first and second generation Communist Party leaders, such as Mao Zedong and Deng Xiaoping, ruled as single paramount leaders. But over the past two decades, Chinese leaders have tried to institutionalize governance with an emphasis on collective leadership - except when it comes to choosing leaders.

The process is highly secretive and influenced by faction leaders who jockey to get their allies on the 25-member Politburo and its apex body, the seven-member Politburo Standing Committee.

"In certain areas the rules and the norms of institutionalization continue, but in certain areas they are subject to manipulation, in particular with regard to the selection of the Politburo," said Cheng Li, director of research at the John L. Thornton China Center in the Foreign Policy program at the Brookings Institution.

China's once-in-a-decade leadership transition last November installed a largely caretaker leadership in the Standing Committee. In 2017, five of the seven members will reach retirement age after one term in office. Only China's top two leaders, president-in-waiting Xi Jinping and premier-in-waiting Li Keqiang, will remain on the powerful body in 2017.

Two main factions are competing for power within the Standing Committee. Members of the "Shanghai Gang", headed by former Party chief Jiang Zemin, have connections to China's commercial capital. The other main faction, the "Tuanpai," is led by outgoing President Hu Jintao. Its members, like him, cultivated their careers in the Communist Youth League.

Most of the Politburo members and provincial Party secretaries eligible for promotion in the next term in 2017 have experience in the Communist Youth League, according to data from "Connected China"(http://connectedchina.reuters.com), a Reuters site that tracks the careers and connections of China's top leaders.

Although the Politburo appointed in November shows strong ties to Jiang Zemin, analysts say outgoing President Hu Jintao's Communist Youth League faction will gain the upper hand over the longer term.

A third group has also ascended rapidly - the princelings, or privileged children of revolutionary leaders. Key princelings include Xi and Politburo Standing Committee members Yu Zhengsheng, Wang Qishan and Zhang Dejiang.

CONSENSUS BUILDER

Xi is the first Communist Party General Secretary to take power while his two predecessors are both still alive. That puts him in the role of cautious consensus-builder between factions allied to his two predecessors, rather than an agent of reform, political analysts said.

"I don't think can push much because it's still a Jiang (Zemin) Politburo Standing Committee," said David Zweig, a Chinese politics scholar at Hong Kong University of Science and Technology.

Six of the seven members on the Standing Committee have ties to Jiang, who relinquished the top Party position over a decade ago. Premier-in-waiting Li, whose ties with Hu go back to the 1980s, is the only Standing Committee member considered to be a Hu protégé and a member of his Tuanpai faction.

But the 86-year-old Jiang is 16 years Hu's senior. Few of his protégés are expected to stay on when the Standing Committee members are scheduled to retire in 2017.

Factions of this kind rarely survive the death of its leader, said Jiangnan Zhu, a Hong Kong University associate professor specializing in Chinese politics.

"Usually, when a patron dies, his followers can't hold together for very long, and his faction will eventually fall. This was basically the case for Mao, the most powerful patron in CCP history," Zhu said.

TUANPAI CONNECTIONS

The Tuanpai could be the exception. It traces its origins to former Communist Youth League leader Hu Yaobang, who promoted many Tuanpai officials, including Hu Jintao, during his tenure as Party General Secretary in the 1980s. The Tuanpai's influence expanded under Hu when he became General Secretary in 2002.

Under Hu the number of Tuanpai leaders in top provincial top posts increased from five in 2002 to 13 in 2005, and rose to 21 in 2010. Connections to the Communist Youth League are a common denominator for many figures seen as the next generation of leaders, data from Connected China shows.

Of the 14 members in the 25-member Politburo eligible for another term in 2017, nine have worked in the Communist Youth League and are considered to be protégés or allies of Hu. Only five are known to have ties with Jiang.

Communist Youth League experience is even more prevalent among provincial-level Party chiefs.

Provincial Party leadership has become almost a prerequisite for a top leadership post. Among the 29 eligible for Politburo membership next year, 19 have experience in the Communist Youth League, and 11 are considered to be members of the Tuanpai faction, the data from Connected China shows.

FIFTH AND SIXTH GENERATION

The promotion of so many Communist Youth League members is largely credited to Hu protégé, Li Yuanchao. As head of the Party's Organisation Department, he promoted many of his mentor's allies.

Three of the top contenders for seats in the 2017 Politburo Standing Committee are linked to Hu Jintao - Li Yuanchao, former Guangdong provincial Party chief Wang Yang, and the current Guangdong boss, Hu Chunhua. If promoted, those three along with premier-in-waiting Li, would occupy more than half of the Standing Committee seats in 2017.

"Hu Jintao has been very successful in nurturing future leaders amongst the fifth and the sixth generation from the youth league," said Willy Lam, a scholar on Chinese history and politics at the Chinese University of Hong Kong.

But the Tuanpai also has a problem, he said. Except perhaps for Wang Yang and Li Yuanchao who are seen as experienced leaders, few other leaders from the Tuanpai have a strong track record.

XI'S POWER BASE

Xi's power base is in the military where a number of princelings have made their careers, according to Lam.

The data from Connected China shows Xi has far fewer ties to other contenders in the Party and the government. Of the 14 members of the Politburo eligible for another term in 2017, only two are known to have close ties with Xi - Li Zhanshu and Xu Qiliang. As director of the Central Committee General Office, Li is Xi's chief of staff. Xu is a military official seen as unlikely to be promoted to the Politburo Standing Committee.

"Xi will not have enough time to build up a distinct faction," Lam said. "He will have to spend a lot of time building consensus within the top leadership because he doesn't have a distinct faction of his own. So there will be a lot of give and take.

"Politically, I think things will remain frozen as it's difficult to get a consensus for political reform," Lam said.

(Additional reporting by Jean Lin, Julie Zhu and Elizabeth Dilts; ; Reporting by Irene Jay Liu and Chris Ip; Editing by Bill Tarrant)

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Analysis: EU needs "who lost Italy" debate on austerity

BRUSSELS (Reuters) - European policymakers should be asking themselves "who lost Italy" after a grassroots revolt against austerity, unemployment and the political elite caused an electoral earthquake in the euro zone's number three economy.

Instead, most are insisting that their policy mix to fight the currency area's debt crisis is right, even though the latest EU forecasts have pushed any prospect of meaningful economic recovery in southern Europe back into the middle distance.

A surge in support for anti-euro populist Beppe Grillo and the surprise resurrection of former Prime Minister Silvio Berlusconi on an anti-austerity platform in last week's election have plunged Rome into political deadlock.

Italy, which had been governed by respected technocrat Mario Monti for 15 months since Berlusconi's last government fell, is far from the worst affected by the three-year-old debt crisis.

Unemployment there stands at 11.7 percent, less than half the rate of Greece and Spain, where one of every two young people is without a job.

If a milder recession and less severe spending cuts and tax rises can cause such a social and electoral revolt in Italy, the risks of an explosion in Greece and Spain ought to be greater.

Yet the official reaction from Brussels and Frankfurt is to act as if nothing, or almost nothing, had happened.

"The crisis is not yet over and efforts must not be relaxed," European Commission President Jose Manuel Barroso said in a joint statement with Monti two days after the election.

At a Reuters Summit on the future of the euro zone, Barroso appealed to European leaders to stay the course and "not give in to populism". Despite the bleak growth forecasts, structural reforms were starting to bear fruit, he said.

Barroso reeled off figures showing current account deficits in Portugal, Spain, Italy and Greece were shrinking and Ireland was back in surplus. Exports from Spain and Portugal were rising and the labor competitiveness gap between northern and southern Europe was narrowing.

Those numbers have a flipside. Payments imbalances are down mostly because those countries' imports have shrunk due to sinking demand. The labor cost gap has declined largely due to mass layoffs in southern states rather than productivity gains.

Exports account for less than 20 percent of the Iberian countries' output, less than half Germany's ratio and too little to offer a fast track to recovery.

SOCIAL CRISIS

While the European Central Bank removed the danger of a financial meltdown of the euro zone with its bond-buying plan, there is now a growing risk of a social crisis that could lead to one or more southern countries leaving the currency area.

"I absolutely think it can get a lot worse," said Clemens Fuest, the incoming chief of Germany's respected ZEW economic research institute.

"There is really the current plausible scenario for a break-up of the currency union. It may very well be that in these countries at some point the population will say 'we don't believe things will get better'," he told the Reuters Summit.

The degree of despair would have to be high to risk leaving the euro area, "but if things continue, if unemployment goes up to 30 percent... in Spain, there certainly is a danger that might happen".

Zsolt Darvas of the Bruegel think-tank in Brussels said southern European countries were trapped in a downward spiral of economic contraction and rising debt for an unknown duration but had no alternative to fiscal consolidation.

The only way out was to alter Europe's fiscal policy mix by stimulating demand in northern Europe, notably with tax cuts in Germany, and giving the European Investment Bank a huge capital increase to lend to companies in southern Europe, he said.

Using the EIB to inject the equivalent of 2-3 percent of gross domestic product a year into south European economies for a limited number of years would be the most effective and politically feasible way to revive growth, Darvas said.

No such plans are under consideration in the European Union, and German, Dutch and Finnish voters remain deeply hostile to any fiscal transfers to southern Europe.

With Germany facing its own general election in September, followed by the usual period of coalition negotiations, it is hard to imagine any major policy shift this year.

EU growth initiatives so far have been on a far more modest scale, including a small boost to EIB capital last year and a recently created 6 billion euro youth employment fund due to take effect next January to support job training and mobility.

Monti warned repeatedly last year that anti-European populists would gain ground in the south unless the euro zone did more to support his efforts and those of Spanish Prime Minister Mariano Rajoy by bringing down borrowing costs.

Those costs did fall significantly after the ECB announced its bond-buying initiative in September, but Monti's appeal for more financial solidarity from Germany fell on deaf ears.

Whether his election debacle, after European leaders encouraged him to enter the race, will sway minds in the EU remains to be seen.

For the moment, their key priority is to help Ireland and Portugal return to capital markets later this year to demonstrate success for their bailout and adjustment programs.

French Finance Minister Pierre Moscovici, also speaking at the Reuters Summit, was one of the rare voices to say the Italian voter backlash showed that austerity had gone far enough and it was time to strengthen growth.

His German counterpart, Wolfgang Schaeuble, a leading advocate of austerity during the crisis, drew no such lesson, saying European policies were not to blame for greater inequality and economic divergence between north and south.

"We need to continue on this path, but we will have setbacks," Schaeuble said.

It may take another, bigger jolt than Italy's election to spur euro zone leaders to change course, if they ever do.

(Writing by Paul Taylor; Editing by Jeremy Gaunt)

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