Chad says it killed Algeria hostage mastermind in Mali

N'DJAMENA (Reuters) - Chadian soldiers in Mali have killed Mokhtar Belmokhtar, the al Qaeda commander who masterminded a bloody hostage-taking at an Algerian gas plant in January, Chad's military said on Saturday.

The death of one of the world's most wanted jihadists would be a major blow to al Qaeda in the region and to Islamist rebels already forced to flee towns they had seized in northern Mali by an offensive by French and African troops.

"On Saturday, March 2, at noon, Chadian armed forces operating in northern Mali completely destroyed a terrorist base. ... The toll included several dead terrorists, including their leader Mokhtar Belmokhtar," Chad's armed forces said in a statement read on national television.

On Friday, Chad's president, Idriss Deby, said his soldiers had killed another al Qaeda commander, Adelhamid Abou Zeid, among 40 militants who died in an operation in the same area as Saturday's assault - Mali's Adrar des Ifoghas mountains near the Algerian border.

France - which has used jet strikes against the militants' mountain hideouts - has declined to confirm the killing of either Abou Zeid or Belmokhtar.

In Washington, an Obama administration said the White House could not confirm the killing of Belmokhtar.

Analysts said the death of two of al Qaeda's most feared commanders in the Sahara desert would mark a significant blow to Mali's Islamist rebellion.

"Both men have extensive knowledge of northern Mali and parts of the broader Sahel and deep social and other connections in northern Mali, and the death of both in such a short amount of time will likely have an impact on militant operations," said Andrew Lebovich, a Dakar-based analyst who follows al Qaeda in the Islamic Maghreb (AQIM).

Anne Giudicelli, managing director of security consultancy Terrorisc, said the al Qaeda commanders' deaths - if confirmed - would temporarily disrupt the Islamist rebel network but would also raise concern over the fate of seven French hostages believed to be held by Islamists in northern Mali.

Chad is one of several African nations that have contributed forces to a French-led military intervention in Mali aimed at ridding its vast northern desert of Islamist rebels who seized the area nearly a year ago following a coup in the capital.

Western and African countries are worried that al Qaeda could use the zone to launch international attacks and strengthen ties with African Islamist groups like al Shabaab in Somalia and Boko Haram in Nigeria.

'MARLBORO MAN'

Belmokhtar, 40, who lost an eye while fighting in Afghanistan in the 1990s, claimed responsibility for the seizure of dozens of foreign hostages at the In Amenas gas plant in Algeria in January in which more than 60 people were killed.

That attack put Algeria back on the map of global jihad, 20 years after its civil war, a bloody Islamist struggle for power. It also burnished Belmokhtar's jihadi credentials by showing that al Qaeda remained a potent threat to Western interests despite U.S. forces killing Osama bin Laden in Pakistan in 2011.

Before In Amenas, some intelligence experts had assumed Algerian-born Belmokhtar had drifted away from jihad in favor of kidnapping and smuggling weapons and cigarettes in the Sahara where he earned the nickname "Marlboro Man".

In a rare interview with a Mauritanian news service in late 2011, Belmokhtar paid homage to bin Laden and his successor, Ayman al-Zawahri. He cited al Qaeda's traditional global preoccupations, including Iraq, Afghanistan and the fate of the Palestinians, and stressed the need to "attack Western and Jewish economic and military interests".

He shared command of field operations for AQIM - al Qaeda's North African franchise - with Abou Zeid, although there was talk the two did not get along and were competing for power.

A former smuggler turned jihadi, Algerian-born Abou Zeid imposed a violent form of sharia, Islamic law, in the ancient desert town of Timbuktu, including amputations and the destruction of ancient Sufi shrines.

Robert Fowler, a former Canadian diplomat held hostage by Belmokhtar from 2008 to 2009, told Reuters, "While I cannot consider reports of the death of both Abou Zeid and Mokhtar Belmokhtar as anything but good news ... I must temper my enthusiasm by the fact that this is by no means the first time Belmokhtar's death has been reported."

President Francois Hollande said on Friday that the assault to retake Mali's vast desert north from AQIM and other Islamist rebels that began on January 11 was in its final stage and so could not confirm Abou Zeid's death.

A U.S. official and a Western diplomat said, however, the reports about Abou Zeid's death appeared to be credible.

U.S. Representative Ed Royce, Republican chairman of the House Foreign Affairs Committee, said the killing of Belmokhtar "would be a hard blow to the collection of jihadists operating across the region that are targeting American diplomats and energy workers."

Washington has said it believes Islamists operating in Mali were involved in the killing of the U.S. ambassador in Libya's eastern city of Benghazi in September.

After its success in dislodging al Qaeda fighters from northern Mali's towns, France and its African allies have faced a mounting wave of suicide bombings and guerrilla-style raids by Islamists in northern Malian towns.

U.N. Secretary-General Ban Ki-moon said on Friday that a U.N. peacekeeping force to replace French troops in Mali should be discussed as soon as possible.

Chad was among the quickest to respond to Mali's appeals for help alongside the French, rushing in hundreds of troops experienced in desert warfare, led by Deby's son, General Mahamat Deby.

The country's president may be hoping to polish his regional and international credentials by assisting in this war, while bolstering his own position in power in Chad, which has been threatened in the past by eastern neighbor Sudan.

(Additional reporting by John Irish and David Lewis in Dakar, Gus Trompiz in Paris, and Mark Hosenball and Mark Felsenthal in Washington; Writing by Richard Valdmanis; Editing by Robin Pomeroy and Peter Cooney)

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World powers and Iran end talks, sides to meet again

ALMATY (Reuters) - World powers ended two days of talks with Iran on Wednesday with no sign of a breakthrough, and the two sides have agreed to meet at expert level in Istanbul next month and to hold further high-level negotiations in Kazakhstan in April.

At the talks that ended in the Kazakh city of Almaty, the six world powers - France, Germany, the United States, China Russia and Britain - offered to lift some sanctions if Iran scaled back nuclear activity the West fears could be used to build bombs. Tehran denies seeking nuclear weapons.

Hopes of a significant easing of the deadlock in the decade-old dispute were dented when Russian media cited a source close to the talks as saying there had been no clear progress.

"So far there is no particular rapprochement. There is an impression that the atmosphere is not very good," Interfax news agency quoted the source as saying shortly before the talks ended.

Iran said the expert-level talks between the two sides would be held in Istanbul on March 18 and another round of political negotiations in Almaty on April 5-6.

Russia's negotiator, Deputy Foreign Minister Sergei Ryabkov, said the Istanbul meeting would take place on March 17-18 and gave the same dates as Iran of April 5-6 for the Almaty talks.

The meeting in Almaty that ended on Wednesday was the first between the world powers and Iran in eight months. Western officials described the first day of the talks as "useful". Iranian state television described the atmosphere in the discussions as "very serious".

The outcome will be closely watched in Israel, which has strongly hinted that it could attack Iran's nuclear sites if diplomacy and sanctions fail to stop Tehran's uranium enrichment program.

Iran says Israel's assumed nuclear arsenal is the main threat to peace and denies Western allegations it is seeking to develop the capability to make atomic bombs. It says it is only aiming to produce nuclear energy so that it can export more oil.

In their latest attempt to break years of stalemate in the dispute, the powers are offering Iran a relaxation of some of the sanctions that are taking a heavy toll on its economy.

Western officials have confirmed the offer includes some limited sanctions easing if Iran closes a underground site where it carries out its most controversial uranium enrichment work.

Diplomats had seen scant chances of a conclusive deal with Iran before a June presidential election - with the political elite preoccupied with domestic issues - but they had hoped to hold follow-up talks soon.

(Additional reporting by Yeganeh Torbati in Almaty, Zahra Hosseinian in Zurich, Gabriela Baczynska in Moscow, Dan Williams in Jerusalem and Marcus George in Dubai; Writing by Timothy Heritage and Fredrik Dahl; Editing by Pravin Char)

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Italians head to polls in crucial vote for euro zone

ROME (Reuters) - Italians began voting on Sunday in one of the most closely watched elections in years, with markets nervous about whether it will produce a strong government to pull Italy out of recession and help resolve the euro zone debt crisis.

A huge final rally by anti-establishment-comedian-turned-politician Beppe Grillo on Friday before a campaigning ban kicked in has highlighted public anger at traditional parties and added to uncertainty about the election outcome.

Voters started casting their ballots at 0700 GMT. Polling booths will remain open until 2100 GMT on Sunday and between 0600-1400 GMT on Monday. Exit polls will come out soon after voting ends and official results are expected by early Tuesday.

The election is being followed closely by financial markets with memories still fresh of the potentially catastrophic debt crisis that brought technocrat Prime Minister Mario Monti to power more than a year ago.

Italy, the euro zone's third-largest economy, is stuck in deep recession, struggling under a public debt burden second only to Greece's in the 17-member currency bloc and with a public weary of more than a year of harsh austerity policies.

Final polls published two weeks ago showed center-left leader Pier Luigi Bersani with a 5-point lead, but analysts disagree about whether he will be able to form a stable majority that can push though the economic reforms Italy needs.

Bersani is now thought to be just a few points ahead of center-right rival Silvio Berlusconi, the four-times prime minister who has promised tax refunds and staged a media blitz in an attempt to win back voters.

BERLUSCONI CRITICISM

Berlusconi hogged the headlines on Sunday after he broke the campaign silence the previous evening attack magistrates, saying they were "more dangerous than the Sicilian mafia" and had invented allegations he held sex parties to discredit him.

The 76-year-old billionaire, who faces several trials on charges ranging from fraud to sex with an underage prostitute, was criticized by his election rivals for making the comments after the campaigning ban had come into force.

While the center left is still expected to gain control of the lower house, thanks to rules that guarantee a strong majority to whichever party wins the most votes nationally, a much closer battle will be fought in the Senate, which any government also needs to control to be able to pass laws.

Seats in the upper house are awarded on a region-by-region basis, meaning that support in key regions can decisively influence the overall result.

Pollsters still believe the most likely outcome is a center-left government headed by Bersani and possibly backed by Monti, who is leading a centrist coalition.

But strong campaigning by Berlusconi and the fiery Grillo, who has drawn tens of thousands to his election rallies, have thrown the election wide open, causing concern that there may be no clear winner.

Surveys have shown up to 5 million voters are expected to make up their minds at the last minute, adding to uncertainty.

Italy's Interior Ministry urged some 47 million eligible voters to not let bad weather forecasts put them off, and said it was prepared to handle snowy conditions in some northern regions to ensure everyone had a chance to vote.

STAGNANT ECONOMY

Whatever government emerges from the vote will have the task of pulling Italy out of its longest recession for 20 years and reviving an economy largely stagnant for two decades.

The main danger for Italy and the euro zone is a weak government incapable of taking firm action, which would rattle investors and could ignite a new debt crisis.

Monti replaced Berlusconi in November 2011 after Italy came close to Greek-style financial meltdown while the center-right government was embroiled in scandals.

The former European Commissioner launched a tough program of spending cuts, tax hikes and pension reforms which won widespread international backing and helped restore Italy's credibility abroad after the scandals of the Berlusconi era.

Italy's borrowing costs have since fallen sharply after the European Central Bank pledged it was prepared to support countries undertaking reforms by buying unlimited quantities of their bonds on the markets.

But economic austerity has fuelled anger among Italians grappling with rising unemployment and shrinking disposable incomes, encouraging many to turn to Grillo, who has tapped into a national mood of disenchantment.

(Editing by Alison Williams)

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Abe vows to revive Japanese economy, sees no escalation with China

WASHINGTON (Reuters) - Japanese Prime Minister Shinzo Abe told Americans on Friday "I am back and so is Japan" and vowed to get the world's third biggest economy growing again and to do more to bolster security and the rule of law in an Asia roiled by territorial disputes.

Abe had firm words for China in a policy speech to a top Washington think-tank, but also tempered his remarks by saying he had no desire to escalate a row over islets in the East China Sea that Tokyo controls and Beijing claims.

"No nation should make any miscalculation about firmness of our resolve. No one should ever doubt the robustness of the Japan-U.S. alliance," he told the Center for Strategic and International Studies.

"At the same time, I have absolutely no intention to climb up the escalation ladder," Abe said in a speech in English.

After meeting U.S. President Barack Obama on his first trip to Washington since taking office in December in a rare comeback to Japan's top job, he said he told Obama that Tokyo would handle the islands issue "in a calm manner."

"We will continue to do so and we have always done so," he said through a translator, while sitting next to Obama in the White House Oval Office.

Tension surged in 2012, raising fears of an unintended military incident near the islands, known as the Senkaku in Japan and the Diaoyu in China. Washington says the islets fall under a U.S.-Japan security pact, but it is eager to avoid a clash in the region.

Abe said he and Obama "agreed that we have to work together to maintain the freedom of the seas and also that we would have to create a region which is governed based not on force but based on an international law."

Abe, whose troubled first term ended after just one year when he abruptly quit in 2007, has vowed to revive Japan's economy with a mix of hyper-easy monetary policy, big spending, and structural reform. The hawkish leader is also boosting Japan's defense spending for the first time in 11 years.

"Japan is not, and will never be, a tier-two country," Abe said in his speech. "So today ... I make a pledge. I will bring back a strong Japan, strong enough to do even more good for the betterment of the world."

'ABENOMICS' TO BOOST TRADE

The Japanese leader stressed that his "Abenomics" recipe would be good for the United States, China and other trading partners.

"Soon, Japan will export more, but it will import more as well," Abe said in the speech. "The U.S. will be the first to benefit, followed by China, India, Indonesia and so on."

Abe said Obama welcomed his economic policy, while Deputy Chief Cabinet Secretary Katsunobu Kato said the two leaders did not discuss currencies, in a sign that the U.S. does not oppose "Abenomics" despite concern that Japan is weakening its currency to export its way out of recession.

The United States and Japan agreed language during Abe's visit that could set the stage for Tokyo to join negotiations soon on a U.S.-led regional free trade agreement known as the Trans-Pacific Partnership.

In a carefully worded statement following the meeting between Obama and Abe, the two countries reaffirmed that "all goods would be subject to negotiations if Japan joins the talks with the United States and 10 other countries.

At the same time, the statement envisions a possible outcome where the United States could maintain tariffs on Japanese automobiles and Japan could still protect its rice sector.

"Recognizing that both countries have bilateral trade sensitivities, such as certain agricultural products for Japan and certain manufactured products for the United States, the two governments confirm that, as the final outcome will be determined during the negotiations, it is not required to make a prior commitment to unilaterally eliminate all tariffs upon joining the TPP negotiations," the statement said.

Abe repeated that Japan would not provide any aid for North Korea unless it abandoned its nuclear and missile programs and released Japanese citizens abducted decades ago to help train spies.

Pyongyang admitted in 2002 that its agents had kidnapped 13 Japanese in the 1970s and 1980s. Five have been sent home, but Japan wants better information about eight who Pyongyang says are dead and others Tokyo believes were also kidnapped.

Abe also said he hoped to have a meeting with new Chinese leader Xi Jinping, who takes over as president next month, and would dispatch Finance Minister Taro Aso to attend the inauguration of incoming South Korean President Park Geun-hye next week.

(Additional reporting by Jeff Mason and Doug Palmer; Editing by David Brunnstrom and Paul Simao)

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Syrian opposition says Assad cannot be part of deal

CAIRO (Reuters) - The opposition Syrian National Coalition is willing to negotiate a peace deal to end the country's civil war but President Bashar al-Assad must step down and cannot be a party to any settlement, members agreed after debating a controversial initiative by their president.

The meeting of the 70-member Western, Arab and Turkish-backed coalition began on Thursday before Syrian Foreign Minister Walid al-Moualem is due for talks in Moscow, one of Assad's last foreign allies, and as U.N. mediator Lakhdar Brahimi renews efforts for a deal.

After an angry late night session in which coalition president Moaz Alkhatib came under strong criticism from Islamist and liberal members alike for proposing talks with Assad's government without setting what they described as clear goals, the coalition adopted a political document that demands Assad's removal and trial for the bloodshed, members said.

A draft document seen by Reuters that was circulated for debate said Assad cannot be party to any political solution and has to be tried, but did not directly call for his removal.

"We have adopted the political document that sets the parameters for any talks. The main addition to the draft is a clause about the necessity of Assad stepping step down," said Abdelbasset Sida, a member of the coalition's 12 member politburo who has criticized Alkhatib for acting alone.

"We removed a clause about a need for Russian and U.S. involvement in any talks and added that the coalition's leadership has to be consulted before launching any future initiatives," he added.

Still, the agreement marked a softening of tone by the coalition because previously it had insisted that Assad must step down before any talks with his government could begin.

In an indication that Syria's strongman remains defiant, Brahimi said Assad had told him he will remain president until his term ends in 2014 and then run for re-election.

Brahimi told al-Arabiya television he wants to see a transitional government formed in Syria that would not answer to any higher authority and lasts until U.N.-supervised elections take place in the country.

"I am of the view that U.N. peacekeepers should come to Syria as happened in other countries," Brahimi said.

BOMB, AIR STRIKES

The opposition front convened in Cairo on a day when a car bomb jolted central Damascus, killing 53 people, wounding 200 and incinerating cars on a busy highway close to the Russian Embassy and offices of the ruling Baath Party.

Syrian state television blamed the suicide blast on "terrorists". Central Damascus has been relatively insulated from the 23-month conflict that has killed around 70,000 people, but the bloodshed has shattered suburbs around the capital.

In the southern city of Deraa near the border with Jordan, activists said warplanes bombed the old quarter for the first time since March 2011, when the town set in a wheat-growing plain rose up against Assad, starting a national revolt.

A rebel officer in the Tawheed al-Janoub brigade which led an offensive this week in Deraa said there were at least five air strikes on Thursday. The Syrian Observatory for Human Rights said 18 people were killed, including eight rebel fighters.

Coalition member Munther Makhos, who was forced into exile in the 1970s for his opposition to Assad's father, the late President Hafez al-Assad, said supplies from Iran and Russia were giving government forces an awesome firepower advantage.

"It would be surreal to imagine that a political solution is possible. Bashar al-Assad will not send his deputy to negotiate his removal. But we are keeping the door open," Makhos said.

Makhos is the only Alawite in the Islamist-dominated coalition. The Alawite sect, an offshoot of Shi'ite Islam which accounts for about 10 percent of Syria's population but makes up most of the intelligence apparatus and dominates the army and the political system, has generally remained behind Assad.

With Alawites feeling increasingly threatened by a violent Sunni backlash, Alkhatib, a cleric from Damascus who played a role in the peaceful protest movement against Assad at the beginning of the uprising in 2011, has been calling on Alawites to join the revolution, saying their participation will help preserve the social fabric of the country.

Alkhatib's supporters say the initiative has popular support inside Syria from people who want to see a peaceful departure of Assad and a halt to the war that has increasingly pitted his fellow Alawites against Syria's Sunni Muslim majority.

But rebel fighters on the ground, over whom Alkhatib has little control, are generally against the proposal.

The Syrian Islamic Liberation Front, which represents armed brigades, said in a statement it was opposed to Alkhatib's initiative because it ignored the revolt's goal of "the downfall of the regime and all its symbols".

"We are demanding his accountability for the bloodshed and destruction he has wreaked. I think the message is clear enough," said veteran opposition campaigner Walid al-Bunni, who supports Alkhatib.

Alkhatib formulated the initiative in broad terms last month after talks with the Russian and Iranian foreign ministers in Munich but without consulting the coalition, catching the umbrella organization by surprise.

Among Alkhatib's critics is the Muslim Brotherhood, the only organized group in the political opposition.

A Brotherhood source said the group will not scuttle the proposal because it was confident Assad is not interested in a negotiated exit, which could help convince the international community to support the armed struggle for his removal.

"Russia is key," the source said, speaking on condition of anonymity. "We are showing the international community that we are willing to take criticism from the street but the problem is Assad and his inner circle. They do not want to leave."

PLAY FOR RUSSIA

Russia hopes Alkhatib will visit soon in search of a breakthrough. Bunni said Alkhatib would not go to Moscow without the coalition's approval and that he would not be there at the same time as Moualem.

"In my opinion Alkhatib should not go to Moscow until Russia stops sending arms shipments to the Assad regime," Bunni said.

Formal backing by the coalition for Alkhatib's initiative gives it more weight internationally and undermines Assad supporters' argument that the opposition is too divided to be considered a serious player, opposition sources said.

Coalition members and diplomats based in the region said Brahimi asked Alkhatib in Cairo last week to seek full coalition backing for his plan, which resembles the U.N. envoy's own ideas for a negotiated settlement.

One diplomat in contact with the opposition and the United Nations had said a coalition approval of Alkhatib's initiative could help change the position of Russia, which has blocked several United Nations Security Council resolutions on Syria.

The diplomat said only a U.N. resolution could force Assad to the negotiating table, and a U.N. "stabilization force" may still be needed to prevent an all-out slide into a civil war.

"Brahimi has little hope that Assad will agree to any serious talks," the diplomat said. "Differences are narrowing between the United States and Russia about Syria but Moscow remains the main obstacle for Security Council action."

(Editing by Paul Taylor and Mohammad Zargham)

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Mexico security forces abducted dozens in drug war: rights group

IGUALA, Mexico (Reuters) - Dozens of people were abducted and murdered by Mexican security forces over the past six years during a gruesome war with drug cartels, Human Rights Watch said on Wednesday, urging President Enrique Pena Nieto to overhaul the military justice system.

The rights group said that since 2007 it has documented 149 cases of people who were never seen again after falling into the hands of security forces, and that the government failed to properly investigate the "disappearances."

"The result was the most severe crisis of enforced disappearances in Latin America in decades," the U.S.-based group said. (Human Rights Watch report: http://r.reuters.com/fyk26t)

It recommended reforming Mexico's military justice system and creating a national database to link the missing with the thousands of unidentified bodies that piled up during the military-led crackdown on drug cartels.

The report was a grim reminder of the dark side of the war on drug cartels that killed an estimated 70,000 people during former President Felipe Calderon's six-year presidency.

The report also illustrates the obstacles that President Pena Nieto, who took office in December, faces in trying to stem the violence, restore order over areas of the country controlled by the drug cartels and end abuses by security forces.

For nearly three years, 56-year-old shopkeeper Maria Orozco has sought to discover the fate of her son. She says he was abducted along with five colleagues by soldiers from the nightclub where they worked in Iguala, a parched town south of the Mexican capital.

She says a grainy security video, submitted anonymously, shows the moment in 2010 when local soldiers rounded up the men.

"We used to see the military like Superman or Batman or Robin. Super heroes," said Orozco. "Now the spirit of the whole country has turned against them."

Hers was one of the cases illustrated in the Human Rights Watch report.

Pena Nieto has vowed to take a different tack to his predecessor Calderon and focus on reducing violent crime and extortion rather than on going head to head with drug cartels.

The government last month introduced a long-delayed law to trace victims of the drug war and compensate the families. It says it is moving ahead with plans to roll out a genetic database to track victims and help families locate the disappeared.

"There exists, in theory, a database with more than 27,000 people on it," said Lia Limon, deputy secretary of human rights at Mexico's interior ministry. "It's a job that's beginning."

Still, impunity remains rife. The armed forces opened nearly 5,000 investigations into criminal wrongdoing between 2007 and 2012, but only 38 ended in sentencing, according to Human Rights Watch.

In its report it describes the impact of the disappearances on victims' families, a daily reality for Ixchel Mireles, a 50-year-old librarian from the northern city of Torreon, whose husband Hector Tapia was abducted by men in federal police uniforms.

Neither Mireles nor her daughter has heard from Tapia since that night in June 2010.

"I want him to be alive, but the reality just destroys me," said Mireles. "I just want them to give him back, even if he is dead."

Since her husband's disappearance, Mireles has struggled financially, having lost his 40,000 pesos ($3,143) a month salary. She has moved her daughter to a cheaper university and can barely keep up payments on her house.

"I now travel by foot," she said, noting that Mexico's social security system does not recognize the disappeared.

Some family members of the disappeared have asked for soldiers guilty of rights abuses to be judged like civilians, a move Mexico's Supreme Court has approved.

"To us it just seems that the military is untouchable," said Laura Orozco, 36, who says she witnessed her brother's military-led abduction. "They're bulletproof."

($1 = 12.73 pesos)

(Additional reporting by Michael O'Boyle,; Editing by Simon Gardner, Kieran Murray and Lisa Shumaker)

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Insight: Rome will burn, regardless of Italian election result

ROME (Reuters) - Regardless of who wins next weekend's parliamentary election, Italy's long economic decline is likely to continue because the next government won't be strong enough to pursue the tough reforms needed to make its economy competitive again.

Bankers, diplomats and industrialists in Rome and Milan despair at how Italians are shifting allegiances ahead of the February 24-25 vote to favor anti-establishment upstarts and show disgust with the established parties.

That makes it more likely that no bloc will have the political strength to tackle Italy's deep-rooted economic crisis, which has made it Europe's most sluggish large economy for the past two decades.

Final opinion polls predict that the vote will deliver a working majority in both houses for a centre-left coalition governing in alliance with technocrat former prime minister Mario Monti. Political risk consultancy Eurasia assigns this scenario a 50-60 percent probability.

But Italy's election for both chambers of parliament has the potential to tip the euro zone back into instability if the outcome does not produce that result.

The colorful cast of candidates includes disgraced media tycoon Silvio Berlusconi, one of the world's richest men, the bespectacled academic Monti, anti-establishment comedian Beppe Grillo who campaigns from a camper van, and Nichi Vendola, a former communist poet who is the governor of Puglia.

Investors have so far taken a relaxed view, relying on polls produced until the legal deadline for surveys of Feb 10.

One of the best indicators that they are not worried: Italian benchmark 10-year bond yields, which topped six percent during the country's worst political moments in 2011, are now trading around 4.4 percent, almost a full percentage point lower than those of Spain.

Italian stocks have performed broadly in line with the wider European market since January, despite the election and a wave of scandals which has engulfed several leading Italian groups.

But observers in Italy are increasingly nervous that the rosy election scenario favored by investors may not work out.

A jaded electorate, angry about political corruption, economic mismanagement and a national crisis that has impoverished a once-wealthy member of the G7 club of rich nations, could produce a surprise.

Pier Luigi Bersani, the standard-bearer for the centre-left, is a worthy but lackluster former minister whose party has been linked to a banking scandal in the mediaeval Tuscan town of Siena. Support for his party now seems to be fading.

Opponents have latched on to the fact that the ailing bank, Monte dei Paschi, was run by a foundation dominated by political appointees from the centre-left and accused Bersani's party of presiding over a debacle that will cost taxpayers hundreds of millions of euros.

CAMPER VAN POLITICS

Monti, dubbed "Rigor Montis" by one opponent for his austerity policies which critics say hurt growth, is stuck in fourth place and slipping. Detractors say he comes across poorly on the hustings and has been hurt because he formed an election alliance with two discredited centrist politicians who are emblematic of the traditional politics which Monti disavows.

The big gainer in the final days before the election, according to private surveys quoted by experts, is stand-up comedian Beppe Grillo and his anti-establishment 5-Star Movement. Grillo has been on a "tsunami tour" of Italy in a camper van, filling piazzas with his ringing denunciations of the country's political class. He campaigns mainly on the Internet, where his widely read blog features a list of Italy's parliamentarians convicted of a crime (it features 24 names).

"The big question is: what happens to Grillo?" said one senior banker in Milan, speaking on condition of anonymity. "He won't win but he could stop Bersani and Monti from getting enough seats to form an effective government."

Under the electoral law in force for this poll, which almost all Italians agree is in need of reform, voters cast ballots for a party list. The coalition with the most votes is awarded top-up seats in the lower house to give it a 55 percent majority. But in the Senate, the top-up premium applies by region.

Pollsters say the race is too close to call in a few battleground regions but there is a good chance the centre-left will fall short of a majority in the Senate, which has equal law-making powers to the lower house.

A substantial vote for Grillo's movement - and some experts suggest he could top 20 percent - could mean the new parliament is filled with new, inexperienced, anti-establishment deputies who may refuse to do deals with other politicians and block legislation. Bersani and Monti could find themselves without a workable majority in the Senate even in alliance - a scenario which Eurasia believe has a 20-30 percent probability.

"It's hard to see Grillo's movement as a source of stability," said one diplomat, speaking off the record. "There is no chance they would be part of a coalition."

CONVICTION POLITICIAN

Ironically Grillo himself will not be entering parliament regardless of how well his movement does. The shaggy-haired 63-year-old was convicted of manslaughter after three passengers died when a jeep he was driving crashed in 1981, making him ineligible for election under his own party's rules barring convicted criminals from parliament.

"Grillo's agenda is just silly," said one leading Italian columnist, speaking anonymously because his publication did not allow him to be quoted in other media before the vote.

"It's a fuck off policy. He wants to leave Europe, set up people's tribunals, halve public employees. It's the most visible symptom of Italy's political crisis."

The 5-Star Movement is not the only anti-establishment force threatening to make Italy ungovernable. The federalist Northern League, which favors greater autonomy for northern Italy, is polling around five percent nationally. Its leader Roberto Maroni told Reuters last week he would use his seats in parliament in alliance with the centre-right to block a centre-left coalition and prevent it from governing.

The League is particularly important in the Senate as its home region of Lombardy, where the party polls about 15 percent, returns by far the most senators - 49 out of a chamber of 319.

Should Grillo's movement and the Northern League win enough seats to deprive a centre-left coalition with Monti of an overall majority, the most likely outcome is a "grand coalition" of left and right, experts say.

Such a result would unsettle investors because it would be likely to bring centre-right leader former premier Berlusconi, 76, back into government in a key role and Monti would be unlikely to join it.

Berlusconi's own party has boosted its standing in polls over the past month, helped by the former premier's veteran campaigning skill and his dominance of the country's private TV channels. But nobody apart from his own supporters believes he is likely to win this time.

POPE FACTOR

Pope Benedict's unexpected resignation this month has pushed the parliamentary election off the front pages in Italy, giving Berlusconi less print space and TV air time to press his populist message. The main beneficiary appears to be Grillo, whose strategy of ignoring mainstream media and campaigning on the Internet has been unaffected by the news from the Vatican.

Investors above all want a government which will tackle the reasons for Italy's lackluster performance. Italy has hardly grown since the birth of the euro in 1999 and its economy has slumped faster since the 2007 financial crisis than any other in Europe except Greece. Last year, Italy contracted by 2.2 percent, according to official statistics.

Businessmen complain of three main obstacles: stifling bureaucracy, labor laws which offer workers so much protection that they encourage slack performance, and a dysfunctional court system which makes it hard to enforce contracts and collect debts. All are deep-rooted problems and none is likely to be tackled effectively by a weak and divided government.

"Nobody in Italy is ready to make the reforms our country needs right now," said the chief executive of a major Italian company, speaking off the record.

"I am deeply convinced that without a major change in labor flexibility, we will not be able to increase productivity. My personal experience is that Italian labor is fantastic. But if you take a very good worker and tell him his job is completely safe, you will turn him into a slacker."

Italy's byzantine court system - where cases can languish for years - and its legendary bureaucracy are major obstacles to foreign investment and competitiveness, business people and diplomats say. "Foreign companies are surprised by how hard it is to get things done here which we all thought had been agreed in Brussels 20 years ago," said one senior European diplomat.

Monti's technocratic government won plaudits from business for reforming Italy's pension system but its efforts to reform labor laws did not enjoy similar success. Monti's government lasted 13 months until Berlusconi's bloc triggered its collapse by withdrawing support. Some observers in Italy don't believe that the next parliament's make-up will be nearly as conducive to reform as the outgoing one.

MUDDLE-THROUGH OUTCOME

"I want to be optimistic but my best guess is that they will keep to this muddle-through scenario in the next parliament with lackluster results for the economy," said a second senior diplomat. "This country needs a new generation of political leaders."

Key among the concerns of diplomats and business people is the disparate nature of the centre-left coalition leading in polls.

Bersani's election alliance is made up of four main parties, stretching from the former communist Vendola through the Christian left to socialists and centrists. If it is unable to govern alone, as most polls predict, it will need the support of Monti's bloc - itself made up of three parties.

Bankers fear that a government made up of seven different groups of widely varying political hues is highly unlikely to agree on the tough, radical reform measures the country needs.

"If we have a government made up of Bersani, Monti and Vendola, they will argue all the time," said the chief executive. "Bersani and Vendola's capacity for reform is almost zero." Comparing the present Italian centre-left candidate to the former German chancellor whose successful labor reforms belied his socialist roots, he added: "Bersani is no Schroeder".

Bersani's economic spokesman Stefano Fassina insists that the centre-left fully understands the urgency of Italy's economic plight and is committed to deliver on measures to stop the rot. But he puts the emphasis on making the public sector more efficient and persuading Berlin to tone down budget austerity at a European level rather than pursuing labor reform in Italy. Fassina insists that public commitments by Bersani and Vendola on an agreed program will minimize disagreements but he does admit to concern about how a centre-left administration could work with Grillo's unpredictable forces.

"It's impossible to have any discussions with Grillo as a party," he said. "We hope that in parliament some of his MPs will be pragmatic enough to agree on reasonable measures."

With so much uncertainty about the election and the chances fading of it returning a strong, stable reformist government, it is hard to avoid the conclusion that Italy's slow, steady economic decline will continue regardless of the result.

"We've seen a steady economic decline in Italy over the past 20 years and it's very hard to see any outcome from this election which will reverse that. The reforms which would really get the country going again are out of reach," concluded the European diplomat.

(Editing by Peter Millership and Giles Elgood)

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Chavez back in Venezuela, on Twitter with four million followers

CARACAS (Reuters) - After Hugo Chavez spent two months out of the public eye for cancer surgery in Cuba, the Venezuelan government hailed his homecoming on Monday and said the president had achieved another milestone - four million followers on Twitter.

The 58-year-old flew back from Havana before dawn and was taken to a military hospital. No new details were given on his health, and there were no images of his arrival. Officials say his condition remains delicate.

The normally loquacious socialist leader, who is struggling to speak as he breathes through a tracheal tube, took to Twitter with a passion back in April 2010, tweeting regularly and encouraging other leftist Latin American leaders to do likewise.

His @chavezcandanga account quickly drew a big mixed following of fans, critics and others just curious to see how his famously long speeches and fiery anti-U.S. invective would work within the social media network's 140-character limit.

But as he fought the cancer and underwent weeks of grueling chemotherapy and radiation therapy, he began to tweet less and less frequently, before stopping altogether on November 1.

Early on Monday morning, he made his reappearance.

"It was 4:30, 5 a.m. He got to his room and surprised everyone: rat-tat-tat, he sent three or four messages, and at that moment fireworks began to go off around the country," Vice President Nicolas Maduro said in a televised cabinet meeting.

During the day, Maduro added, the president's number of followers had shot up to well over four million.

"It's incredible, in just a few hours ... he's the second most-followed president in the world (after Barack Obama), and the first if we make the comparison by per capita," he said.

Obama has more than 27 million Twitter followers and is No. 5 most followed globally. Chavez is Twitter's No. 190 globally.

4TH MILLION FOLLOWER

Maduro said Chavez's four millionth follower was a 20-year-old single Venezuelan woman named Alemar Jimenez from the gritty San Juan neighborhood in downtown Caracas, near the military hospital where the president arrived earlier in the day.

"She's one of the golden generation of youth who support the fatherland and have been waiting with growing love for commander Hugo Chavez," Maduro said, before presenting a dazzled-looking Jimenez to the cameras and giving her a bunch of flowers.

"We were really emotional" she said, recounting how she was with her mother when they heard Chavez had returned. "I sent him a message on Twitter saying he must get better."

There are still big questions over the president's health. He could have come back to govern from behind the scenes, or he may be hoping to ease political tensions and pave the way for a transition to Maduro, his preferred successor.

Chavez has often ordered followers to fight back against opposition critics of his self-styled revolution by using social media, leading from the front himself on Twitter and referring to the Internet as a "battle trench."

As his ranks of followers grew, Chavez said he hired 200 assistants to help him respond to messages - which he said were a great way to receive first-hand the requests, demands, complaints and denunciations of citizens in the thousands.

During his re-election campaign last year, the government launched an SMS text message service that forwards his tweets to cellphones that lack Internet service, broadening their reach to the poorest corners of the South American country.

"He's a communication revolution!" Maduro said, later unbuttoning his shirt on TV to show he was wearing a T-shirt bearing Chavez's eyes emblazoned across his chest.

For the tens of thousands who signed up on Monday to follow Chavez on Twitter, it is unclear how much will be posted there in the weeks and months ahead. Venezuela's 29 million people are mostly wondering something similar.

(Additional reporting by Diego Ore; Editing by Todd Eastham)

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Pakistan Shi'ites demand protection from militants

QUETTA, Pakistan (Reuters) - Pakistani Shi'ites furious over a sectarian bombing that killed 85 people protested on Monday, demanding that security forces protect them from hardline Sunni groups.

The attack, near a street market in the southwestern city of Quetta on Saturday, highlighted the government's failure to crack down on militancy in nuclear-armed Pakistan just a few months before a general election is due.

While the Taliban and al Qaeda remain a major source of instability, Sunni extremists, who regard Shi'ites as non-Muslims, have emerged as another significant security threat.

Shi'ite frustrations with waves of attacks on them have reached boiling point.

In Quetta, some ethnic Shi'ite Hazaras are refusing to bury their dead until the army and security forces go after Lashkar-e-Jhangvi (LeJ), the group which claimed responsibility for the latest bombing.

Around 4,000 men, women and children placed 71 bodies beside a Shi'ite place of worship. Muslim tradition requires that bodies are buried as soon as possible and leaving them above ground is a potent expression of grief and pain.

Protesters chanted "stop killing Shi'ites".

"We stand firm for our demands of handing over the city to army and carrying out targeted operation against terrorists and their supporters," said Syed Muhammad Hadi, spokesman for an alliance of Shi'ite groups.

"We will not bury the bodies unless our demands are met."

The paramilitary Frontier Corps is largely responsible for security in Baluchistan province, of which Quetta is the capital, but Shi'ites say it is unable or unwilling to protect them.

LeJ has stepped up suicide bombings and shootings in a bid to destabilize strategic U.S. ally Pakistan and install a Sunni theocracy, an echo of the strategy that al Qaeda pursued to try and trigger a civil war in Iraq several years ago.

The group was behind a bombing last month in Quetta, near the Afghan border, that killed nearly 100 people.

In Karachi, a strike to protest against the Quetta bloodshed brought Pakistan's commercial hub to a standstill.

Authorities boosted security as protesters blocked roads, including routes to the airport, disrupted rail services to other parts of the country and torched vehicles.

The roughly 500,000-strong Hazara people in Quetta, who speak a Persian dialect, have distinct features and are an easy target.

The LeJ has had historically close ties to elements in the security forces, who see the group as an ally in any potential war with neighboring India. Security forces deny such links.

(Writing by Michael Georgy; Editing by Alex Richardson)

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Pakistani governor criticizes security forces after bombing

QUETTA, Pakistan (Reuters) - Pakistan's unpopular government, which is gearing up for elections expected within months, came under fire on Sunday for failing to improve security after a sectarian bombing in the city of Quetta killed 80 people.

The nuclear-armed country's leaders have done little to contain hardline Sunni Muslim groups which have stepped up a campaign of bombings and assassinations of minority Shi'ites.

On Saturday, Lashkar-e-Jhangvi (LeJ) claimed responsibility for the attack in Quetta, which deepened suspicions among Shi'ites that Pakistan's intelligence agencies were turning a blind eye to the bloodshed or even supporting Sunni extremists.

"The terrorist attack on the Hazara Shi'ite community in Quetta is a failure of the intelligence and security forces," Nawab Zulfiqar Ali Magsi, governor of Baluchistan province, said while touring a hospital.

"We had given a free hand to security (forces) to take action against terrorist and extremist groups, but despite that the Quetta incident took place."

The death toll from Saturday's bombing rose overnight to 80, with most of the casualties in the main bazaar of the town, capital of Baluchistan, near the border with Afghanistan.

Most of the dead were Hazaras, a Shi'ite ethnic group. A senior security official said the figure could rise as 20 people were critically wounded.

"The government knows exactly who is doing what and who is behind all this," said Mohammad Imran, a local trader. "If the government wants (to prevent it), no one can take even a kitchen knife into any market."

POVERTY, CORRUPTION, POWER CUTS

Frustrations with the government have already been growing over its failure to tackle poverty, corruption and power cuts.

LeJ has also said it was behind a bombing last month in Quetta which killed nearly 100 people, one of Pakistan's worst sectarian attacks.

After that attack, Shi'ite leaders called on Pakistan's military to take over security in Quetta and take on the LeJ.

Growing sectarian violence is piling pressure on the government, which already faces a Taliban insurgency, to deliver stability.

"This is a case of barbarity and heartlessness. This is happening because we are divided and not supporting each other," said Malik Afzal, a Sunni student.

"Unless we decide to unite, we will continue to get killed. Today they (Shi'ites) have died. Tomorrow we (Sunni Muslims) will die. The next day, others will get killed."

Shi'ite political organisations have called for a strike in Quetta to protest against the latest carnage. Many shops and bazaars were closed. Relatives of the wounded responded for an appeal for blood made by hospitals.

Pakistani intelligence officials say extremist groups, led by LeJ, want to destablise the South Asian nation and pave the way for a Sunni theocracy in the strategic U.S. ally

More than 400 Shi'ites were killed in Pakistan last year, many by hitmen or bombs. Some hardline Shi'ite groups have struck back by killing Sunni clerics.

The schism between Sunnis and Shi'ites developed after the Prophet Muhammad died in 632 when his followers could not agree on a successor.

(Reporting by Gul Yousufzai; Editing by Ron Popeski)

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Exclusive: North Korea tells China of preparations for fresh nuclear test - source

BEIJING (Reuters) - North Korea has told its key ally, China, that it is prepared to stage one or even two more nuclear tests this year in an effort to force the United States into diplomatic talks, said a source with direct knowledge of the message.

Further tests could also be accompanied this year by another rocket launch, said the source, who has direct access to the top levels of government in both Beijing and Pyongyang.

North Korea conducted its third nuclear test on Tuesday, drawing global condemnation and a stern warning from the United States that it was a threat and a provocation.

"It's all ready. A fourth and fifth nuclear test and a rocket launch could be conducted soon, possibly this year," the source said, adding that the fourth nuclear test would be much larger than the third, at an equivalent of 10 kilotons of TNT.

The tests will be undertaken, the source said, unless Washington holds talks with North Korea and abandons its policy of what Pyongyang sees as attempts at regime change.

North Korea also reiterated its long-standing desire for the United States to sign a final peace agreement with it and establish diplomatic relations, he said. North Korea remains technically at war with both the United States and South Korea after the Korean war ended in 1953 with a truce.

In Washington, U.S. State Department spokeswoman Victoria Nuland urged North Korea to "refrain from additional provocative actions that would violate its international obligations" under three different sets of U.N. Security Council resolutions that prohibit nuclear and missile tests.

North Korea "is not going to achieve anything in terms of the health, welfare, safety, future of its own people by these kinds of continued provocative actions. It's just going to lead to more isolation," Nuland told reporters.

The Pentagon also weighed in, calling North Korea's missile and nuclear programs "a threat to U.S. national security and to international peace and security."

"The United States remains vigilant in the face of North Korean provocations and steadfast in our defense commitments to allies in the region," said Pentagon spokeswoman Major Catherine Wilkinson.

Initial estimates of this week's test from South Korea's military put its yield at the equivalent of 6-7 kilotons, although a final assessment of yield and what material was used in the explosion may be weeks away.

North Korea's latest test, its third since 2006, prompted warnings from Washington and others that more sanctions would be imposed on the isolated state. The U.N. Security Council has only just tightened sanctions on Pyongyang after it launched a long-range rocket in December.

Pyongyang is banned under U.N. sanctions from developing missile or nuclear technology after its 2006 and 2009 nuclear tests.

North Korea worked to ready its nuclear test site, about 100 km (60 miles) from its border with China, throughout last year, according to commercially available satellite imagery. The images show that it may have already prepared for at least one more test, beyond Tuesday's subterranean explosion.

"Based on satellite imagery that showed there were the same activities in two tunnels, they have one tunnel left after the latest test," said Kune Y. Suh, a nuclear engineering professor at Seoul National University in South Korea.

Analysis of satellite imagery released on Friday by specialist North Korea website 38North showed activity at a rocket site that appeared to indicate it was being prepared for a launch (http://38north.org/2013/02/tonghae021413/).

NORTH 'NOT AFRAID' OF SANCTIONS

President Barack Obama pledged after this week's nuclear test "to lead the world in taking firm action in response to these threats" and diplomats at the U.N. Security Council have already started discussing potential new sanctions.

North Korea has said the test was a reaction to "U.S. hostility" following its December rocket launch. Critics say the rocket launch was aimed at developing technology for an intercontinental ballistic missile.

"(North) Korea is not afraid of (further) sanctions," the source said. "It is confident agricultural and economic reforms will boost grain harvests this year, reducing its food reliance on China."

North Korea's isolated and small economy has few links with the outside world apart from China, its major trading partner and sole influential diplomatic ally.

China signed up for international sanctions against North Korea after the 2006 and 2009 nuclear tests and for a U.N. Security Council resolution passed in January to condemn the latest rocket launch. However, Beijing has stopped short of abandoning all support for Pyongyang.

Sanctions have so far not discouraged North Korea from pursuing its nuclear ambitions.

"It is like watching the same movie over and over again," said Lee Woo-young, a professor at Seoul's University of North Korean Studies. "The idea that stronger sanctions make North Korea stop developing nuclear programs isn't effective in my view."

The source with ties to Beijing and Pyongyang said China would again support U.N. sanctions. He declined to comment on what level of sanctions Beijing would be willing to endorse.

"When China supported U.N. sanctions ... (North) Korea angrily called China a puppet of the United States," he said. "There will be new sanctions which will be harsh. China is likely to agree to it," he said, without elaborating.

He said however that Beijing would not cut food and fuel supplies to North Korea, a measure it reportedly took after a previous nuclear test.

He said North Korea's actions were a distraction for China's leadership, which was concerned that the escalations could inflame public opinion in China and hasten military build-ups in the region.

The source said he saw little room for compromise under North Korea's youthful new leader, Kim Jong-un. The third Kim to rule North Korea is just 30 years old and took over from his father in December 2011.

He appears to have followed his father, Kim Jong-il, in the "military first" strategy that has pushed North Korea ever closer to a workable nuclear missile at the expense of economic development.

"He is much tougher than his father," the source said.

(Additional reporting by Arshad Mohammed and Phillip Stewart in WASHINGTON; Writing by David Chance; Editing by Raju Gopalakrishnan, David Brunnstrom and Jackie Frank)

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Meteorite hits central Russia, 400 hurt

YEKATERINBURG/CHELYABINSK, Russia (Reuters) - About 400 people were injured when a meteorite shot across the sky in central Russia on Friday sending fireballs crashing to Earth, smashing windows and setting off car alarms.

Residents on their way to work in Chelyabinsk heard what sounded like an explosion, saw a bright light and then felt a shockwave, according to a Reuters correspondent in the industrial city 1,500 km (950 miles) east of Moscow.

The meteorite raced across the horizon, leaving a long white trail in its wake which could be seen as far as 200 km (125 miles) away in Yekaterinburg. Car alarms went off, windows shattered and mobile phones worked only intermittently.

Chelyabinsk city authorities said about 400 people sought medical help, mainly for light injuries caused by flying glass.

"I was driving to work, it was quite dark, but it suddenly became as bright as if it was day," said Viktor Prokofiev, 36, a resident of Yekaterinburg in the Urals Mountains.

"I felt like I was blinded by headlights," he said.

No fatalities were reported but President Vladimir Putin, who was due to host Finance Ministry officials from the Group of 20 nations in Moscow, and Prime Minister Dmitry Medvedev were informed.

A local ministry official said the meteor shower may have been connected with an asteroid the size of an Olympic swimming pool that was due to pass Earth at a distance of 27,520 km (17,100 miles) but this could not be confirmed.

Windows were shattered on Chelyabinsk's central Lenin Street and some of the frames of shop fronts buckled.

A loud noise, resembling an explosion, rang out at around 9.20 a.m. (0520 GMT). The shockwave could be felt in apartment buildings in the industrial city's centre.

"I was standing at a bus stop, seeing off my girlfriend," said Andrei, a local resident who did not give his second name. "Then there was a flash and I saw a trail of smoke across the sky and felt a shockwave that smashed windows."

A wall was damaged at the Chelyabinsk Zinc Plant but there was no environmental threat, a plant spokeswoman said.

Such incidents are rare. A meteorite is thought to have devastated an area of more than 2,000 sq km (1,250 miles) in Siberia in 1908, smashing windows as far as 200 km (125 miles) from the point of impact.

The Emergencies Ministry described Friday's events as a "meteor shower in the form of fireballs" and said background radiation levels were normal. It urged residents not to panic.

Chelyabinsk city authorities urged people to stay indoors unless they needed to pick up their children from schools and kindergartens. They said a blast had been heard at an altitude of 10,000 meters (32,800 feet), apparently signaling it occurred when the meteorite entered Earth's atmosphere.

The U.S. space agency NASA has said an asteroid known as 2012 DA14, about 46 meters in diameter, would have an encounter with Earth closer than any asteroid since scientists began routinely monitoring them about 15 years ago.

Television, weather and communications satellites fly about 500 miles higher. The moon is 14 times farther away.

(Writing by Alexei Anishchuk, Editing by Timothy Heritage and Janet Lawrence)

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South Korea unveils missile it says can hit North's leaders

SEOUL (Reuters) - South Korea unveiled a cruise missile on Thursday that it said can hit the office of North Korea's leaders, trying to address concerns that it is technologically behind its unpredictable rival which this week conducted its third nuclear test.

South Korean officials declined to say the exact range of the missile but said it could hit targets anywhere in North Korea.

The Defence Ministry released video footage of the missiles being launched from destroyers and submarines striking mock targets. The weapon was previewed in April last year and officials said deployment was now complete.

"The cruise missile being unveiled today is a precision-guided weapon that can identify and strike the window of the office of North Korea's leadership," ministry spokesman Kim Min-seok told reporters.

North Korea has forged ahead with long-range missile development, successfully launching a rocket in December that put a satellite into orbit.

The North's ultimate aim, Washington believes, is to design an intercontinental ballistic missile capable of carrying a nuclear warhead that could hit the United States.

North Korea, which accuses the United States and its "puppet", South Korea, of war-mongering on an almost daily basis, is likely to respond angrily to South Korea flexing its muscles.

North Korea, technically still at war with the South after their 1950-53 conflict ended in a truce, not a peace treaty, carried out its third nuclear test on Tuesday, drawing condemnation from around the world including its only major ally China.

The test and the threat of more unspecified actions from Pyongyang have raised tensions on the Korean peninsula as the South prepares to inaugurate a new president on February 25.

"The situation prevailing on the Korean peninsula at present is so serious that even a slight accidental case may lead to an all-out war which can disturb the whole region," North Korea's official KCNA news agency said.

(This story has been refiled to drop redundant "said" in fourth paragraph)

(Reporting by Ju-min Park; Editing by Nick Macfie)

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U.S. says to take lead to contain North Korea

SEOUL (Reuters) - U.S. President Barack Obama said North Korea's third nuclear test, in defiance of U.N. resolutions, was a threat and a provocation and that the United States would lead the world in responding.

North Korea has said Tuesday's test was an act of self-defense against "U.S. hostility" and threatened stronger steps if necessary.

"Provocations of the sort we saw last night will only isolate them further, as we stand by our allies, strengthen our own missile defense, and lead the world in taking firm action in response to these threats," Obama said in his State of the Union address, delivered 24 hours after the North's test.

North Korea tested nuclear devices in 2006 and 2009. But despite the three tests and a long-range rocket launch, it is not believed to be close to manufacturing a nuclear missile capable of targeting the United States.

But Washington believes the isolated state's ultimate aim is to design an intercontinental ballistic missile capable of carrying a nuclear warhead that could reach the continental United States. North Korea says its rocket program is aimed at putting satellites in space.

The latest test has drawn condemnation from around the world, including from China which for years has been the North's only major ally.

The U.N. Security Council held an emergency meeting at which its members, including China, "strongly condemned" the test and vowed to start work on appropriate measures in response, the president of the council said.

North Korean leader Kim Jong-un, the third member of his family to rule, has presided over two long-range rocket launches and a nuclear test during his first year in power, pursuing policies that have propelled his impoverished and malnourished country closer to becoming a nuclear weapons power.

North Korea said the test had "greater explosive force" than those in 2006 and 2009. Its KCNA news agency said it had used a "miniaturised" and lighter nuclear device, indicating it had again used plutonium, which is suitable for use as a missile warhead.

EXASPERATED

China, which has shown signs of increasing exasperation with the recent bellicose tone of its reclusive neighbor, summoned the North Korean ambassador in Beijing and protested sternly, the Chinese Foreign Ministry said.

Foreign Minister Yang Jiechi said China was "strongly dissatisfied and resolutely opposed" to the test and urged North Korea to "stop any rhetoric or acts that could worsen situations and return to the right course of dialogue and consultation as soon as possible".

Analysts said the test was a major embarrassment to China, which is a permanent member of the Security Council and North Korea's sole major economic and diplomatic ally.

Obama said the test would be a setback for North Korea's economic development.

"The regime in North Korea must know that they will only achieve security and prosperity by meeting their international obligations," he said.

U.S. ambassador to the United Nations Susan Rice said Washington and its allies intended to "augment the sanctions regime" already in place due to Pyongyang's previous atomic tests. North Korea is already one of the most heavily sanctioned states in the world and has few external economic links that can be targeted.

Japanese Prime Minister Shinzo Abe said the test was a "grave threat" that could not be tolerated.

Russian Foreign Minister Sergei Lavrov urged North Korea to abandon its nuclear arms program and return to talks. NATO condemned the test as an "irresponsible act."

South Korea, still technically at war with North Korea after a 1950-53 civil war ended in a truce, also denounced the test. Obama spoke to South Korean President Lee Myung-bak on Tuesday and told him the United States "remains steadfast in its defense commitments" to South Korea, the White House said.

MAXIMUM RESTRAINT

North Korea's Foreign Ministry said the test was "only the first response we took with maximum restraint".

"If the United States continues to come out with hostility and complicates the situation, we will be forced to take stronger, second and third responses in consecutive steps," it said in a statement carried by the KCNA news agency.

North Korea - which gave the U.S. State Department advance warning of the test - often threatens the United States and its "puppet", South Korea, with destruction in colourful terms.

North Korea told the U.N. disarmament forum in Geneva that it would never bow to resolutions on its nuclear program and that prospects were "gloomy" for the denuclearization of the divided Korean peninsula because of a "hostile" U.S. policy.

The magnitude of the explosion was roughly twice that of the 2009 test, according to the Vienna-based Comprehensive Nuclear-Test Ban Treaty Organization.

U.S. intelligence agencies were analyzing the event and found that North Korea probably conducted an underground nuclear explosion with a yield of "approximately several kilotons", the Office of the Director of National Intelligence said.

Nuclear experts have described the previous two tests as puny by international standards. The yield of the 2006 test has been estimated at less than 1 kiloton (1,000 tons of TNT equivalent) and the second at some 2-7 kilotons, compared with 20 kilotons for a Nagasaki-type bomb.

Initial indications are that the test involved the latest version of a plutonium-based prototype weapon, according to one current and one former U.S. national security official. Both previous tests involved plutonium. If it turns out the test was of a new uranium-based weapon, it would show that North Korea had made more progress on uranium enrichment than previously thought.

"VICIOUS CYCLE"

When Kim Jong-un, who is 30, took power after his father's death in December 2011, there were hopes that he would bring reforms and end Kim Jong-il's "military first" policies.

Instead, North Korea, whose economy is smaller than it was 20 years ago and where a third of children are believed to be malnourished, appears to be trapped in a cycle of sanctions followed by further defiance.

"The more North Korea shoots missiles, launches satellites or conducts nuclear tests, the more the U.N. Security Council will impose new and more severe sanctions," said Shen Dingli, a professor at Shanghai's Fudan University.

"It is an endless, vicious cycle."

Options for a response from the international community appear to be few. Diplomats at the United Nations said negotiations on new sanctions could take weeks since China is likely to resist tough new measures for fear they could lead to further retaliation by the North Korean leadership.

Significantly, the test comes at a time of political transition in China, Japan and South Korea, and as Obama begins his second term.

The North's longer-term game plan may be to restart international talks aimed at winning food and financial aid. China urged it to return to the stalled "six-party" talks on its nuclear programme, hosted by China and including the two Koreas, the United States, Japan and Russia.

(Additional reporting by Jack Kim, Christine Kim and Jumin Park in SEOUL; Linda Sieg in TOKYO; Louis Charbonneau and Michelle Nichols at the UNITED NATIONS; Fredrik Dahl in VIENNA; Michael Martina and Chen Aizhu in BEIJING; Mette Fraende in COPENHAGEN; Adrian Croft, Charlie Dunmore and Justyna Pawlak in BRUSSELS; Mark Hosenball, Paul Eckert, Roberta Rampton, Tabassum Zakaria and Jeff Mason in WASHINGTON; Editing by Raju Gopalakrishnan)

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North Korea conducts third nuclear test, angering U.S., Japan

SEOUL (Reuters) - North Korea conducted its third nuclear test on Tuesday in defiance of U.N. resolutions, angering the United States and Japan and prompting its only major ally, China, to call for calm.

The North said the test had "greater explosive force" than the 2006 and 2009 tests that were widely seen as small-scale. Its KCNA news agency said it had used a "miniaturized" and lighter nuclear device, indicating that it had again used plutonium which is more suitable for use as a missile warhead.

North Korean leader Kim Jong-un, the third of his line to rule the country, has presided over two long-range rocket launches and a nuclear test during his first a year in power, pursuing policies that have propelled his impoverished and malnourished country closer to becoming a nuclear weapons power.

U.S. President Barack Obama termed the test a "highly provocative act" that hurt regional stability.

"The danger posed by North Korea's threatening activities warrants further swift and credible action by the international community. The United States will also continue to take steps necessary to defend ourselves and our allies," Obama said in a statement.

Japanese Prime Minister Shinzo Abe said the test was a "grave threat" that could not be tolerated. U.N. Secretary-General Ban Ki-moon said the test was a "clear and grave violation" of U.N. Security Council resolutions.

China, which has shown signs of increasing exasperation with its neighbor, repeated calls for the "denuclearization" of the Korean peninsula and urged its client state and others to react calmly, while pressing Pyongyang not to ramp up tension further, something the North had threatened in the run-up to the test.

"We strongly urge North Korea to abide by its non-nuclear commitment and not to take any further actions that would worsen the situation", it said in a statement.

South Korea, still technically at war with the North after the 1950-53 civil war ended in a mere truce, said the size of the seismic activity indicated a nuclear explosion slightly larger than the North's two previous tests at 6-7 kilotons, although that is still relatively small. The Hiroshima bomb was around 20 kilotons.

The U.S. Geological Survey said that a seismic event measuring 5.1 magnitude had occurred on Tuesday, with North Korea later confirming the nuclear test.

"It was confirmed that the nuclear test that was carried out at a high level in a safe and perfect manner using a miniaturized and lighter nuclear device with greater explosive force than previously did not pose any negative impact on the surrounding ecological environment," KCNA said.

The test prompted the U.N. Security Council to call for an emergency meeting later on Tuesday. Despite the tame official response, it likely to be a major embarrassment for Beijing, the North's sole major economic and diplomatic ally.

"The test is hugely insulting to China, which now can be expected to follow through with threats to impose sanctions," said Mark Fitzpatrick of the International Institute for Strategic Studies think tank.

North Korea trumpeted the announcement on its state television channel to patriotic music against the backdrop of an image of its national flag.

It linked the test to its technical prowess in launching a long-range rocket in December, a move that triggered the U.N. sanctions, backed by China, that Pyongyang said prompted it to carry out Tuesday's nuclear test.

The North's ultimate aim, Washington believes, is to design an intercontinental ballistic missile capable of carrying a nuclear warhead that could hit the United States. North Korea says the program is aimed merely at putting satellites in space.

North Korea used plutonium in previous nuclear tests and prior to Tuesday there had been speculation it would use highly enriched uranium so as to conserve its plutonium stocks as testing eats into its limited supply of the material that could be used to construct a nuclear bomb.

"VICIOUS CYCLE"

Despite its three nuclear tests and long-range rocket tests, North Korea is not believed to be close to manufacturing a nuclear missile capable of hitting the United States.

Japan immediately called for more sanctions against North Korea and South Korea's defense ministry said additional nuclear tests and rocket launches by the North should not be ruled out.

South Korea's Yonhap news agency said Pyongyang had informed China and the United States of its plans to test on Monday, although this could not be confirmed.

When new leader Kim, now aged 30, took power after his father's death in December 2011, there were hopes the he would bring reforms and end Kim Jong-il's "military first" policies.

Instead of which, the North, whose economy is smaller than it was 20 years ago and where a third of children are believed to be malnourished, appears to be trapped in a cycle of sanctions followed by further provocations.

"The more North Korea shoots missiles, launches satellites or conducts nuclear tests, the more the U.N. Security Council will impose new and more severe sanctions," said Shen Dingli, a professor and regional security expert at Shanghai's Fudan University.

"It is an endless, vicious cycle."

But options for the international community appear to be in short supply, as North Korea is already one of the most heavily sanctioned states on earth.

Tuesday's action appeared to have been timed for the run-up to February 16 anniversary celebrations of Kim Jong-il's birthday, as well as to achieved maximum international attention.

Significantly, the test comes at a time of political transition in China, Japan and South Korea, and as Obama begins his second term. He will likely have to tweak his State of the Union address due to be given on Tuesday.

Japanese Prime Minister Shinzo Abe is bedding down a new government and South Korea's new president, Park Geun-hye, prepares to take office on February 25.

China too is in the midst of a once-in-a-decade leadership transition to Xi Jinping, who takes office in March. Both Abe and Xi are staunch nationalists.

The longer-term game plan from Pyongyang may be to restart talks aimed at winning food and financial aid.

Its puny economy and small diplomatic reach mean the North struggles to win attention on the global stage - other than through nuclear tests and attacks on South Korea, last made in 2010.

"Now the next step for North Korea will be to offer talks... - any form to start up discussion again to bring things to their advantage," said Jeung Young-tae, senior research fellow at the Korea Institute for National Unification in Seoul.

(Additional reporting by Jack Kim, Christine Kim and Jumin Park in SEOUL; Linda Sieg in TOKYO; Louis Charbonneau at the UNITED NATIONS; Fredrik Dahl in VIENNA; Michael Martina in BEIJING; Editing by Nick Macfie)

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Gunbattle rocks Gao after rebels surprise French, Malians

GAO, Mali (Reuters) - Islamist insurgents launched a surprise raid in the heart of the Malian town of Gao on Sunday, battling French and local troops in a blow to efforts to secure Mali's recaptured north.

Local residents hid in their homes or crouched behind walls as the crackle of gunfire from running street battles resounded through the sandy streets and mud-brick houses of the ancient Niger River town, retaken from Islamist rebels last month by a French-led offensive.

French helicopters clattered overhead and fired on al Qaeda-allied rebels armed with AK-47s and rocket-propelled grenades who had infiltrated the central market area and holed up in a police station, Malian and French officers said.

The fighting inside Gao was certain to raise fears that pockets of determined Islamists who have escaped the lightning four-week-old French intervention in Mali will strike back with guerrilla attacks and suicide bombings.

After driving the bulk of the insurgents from major northern towns such as Timbuktu and Gao, French forces are trying to search out their bases in the remote and rugged Adrar des Ifoghas mountains, far up in the northeast.

But with Mali's weak army unable to secure recaptured zones, and the deployment of a larger African security force slowed by delays and kit shortages, vast areas to the rear of the French forward lines now look vulnerable to guerrilla activity.

"They infiltrated the town via the river. We think there were about 10 of them. They were identified by the population and they went into the police station," said General Bernard Barrera, commander of French ground operations in Mali.

He told reporters in Gao that French helicopters had intervened to help Malian troops pinned down by the rebels, who threw grenades from rooftops.

Malian gendarme Colonel Saliou Maiga told Reuters the insurgents intended to carry out suicide attacks in the town.

SUICIDE BOMBERS

No casualty toll was immediately available. But a Reuters reporter in Gao saw one body crumpled over a motorcycle. Malian soldiers said some of the raiders may have come on motorbikes.

The gunfire in Gao erupted hours after French and Malian forces reinforced a checkpoint on the northern outskirts that had been attacked for the second time in two days by a suicide bomber.

Abdoul Abdoulaye Sidibe, a Malian parliamentarian from Gao, said the rebel infiltrators were from the MUJWA group that had held the town until French forces liberated it late last month.

MUJWA is a splinter faction of al Qaeda's North African wing AQIM which, in loose alliance with the home-grown Malian Islamist group Ansar Dine, held Mali's main northern urban areas for 10 months until the French offensive drove them out.

Late on Saturday, an army checkpoint in Gao's northern outskirts came under attack by a group of Islamist rebels who fired from a road and bridge that lead north through the desert scrub by the Niger River to Bourem, 80 km (50 miles) away.

"Our soldiers came under heavy gunfire from jihadists from the bridge ... At the same time, another one flanked round and jumped over the wall. He was able to set off his suicide belt," Malian Captain Sidiki Diarra told reporters.

The bomber died and one Malian soldier was lightly wounded, he added. In Friday's motorbike suicide bomber attack, a Malian soldier was also injured.

Diarra described Saturday's bomber as a bearded Arab.

Since Gao and the UNESCO World Heritage city of Timbuktu were retaken last month, several Malian soldiers have been killed in landmine explosions on a main road leading north.

French and Malian officers say pockets of rebels are still in the bush and desert between major towns and pose a threat of hit-and-run guerrilla raids and bombings.

"We are in a dangerous zone... we can't be everywhere," a French officer told reporters, asking not to be named.

One local resident reported seeing a group of 10 armed Islamist fighters at Batel, just 10 km (6 miles) from Gao.

OPERATIONS IN NORTHEAST

The French, who have around 4,000 troops in Mali, are now focusing their offensive operations several hundred kilometers (miles) north of Gao in a hunt for the Islamist insurgents.

On Friday, French special forces paratroopers seized the airstrip and town of Tessalit, near the Algerian border.

From here, the French, aided by around 1,000 Chadian troops in the northeast Kidal region, are expected to conduct combat patrols into the Adrar des Ifoghas mountains.

The remaining Islamists are believed to have hideouts and supply depots in a rugged, sun-blasted range of rocky gullies and caves, and are also thought to be holding at least seven French hostages previously seized in the Sahel.

The U.S. and European governments back the French-led operation as a defense against Islamist jihadists threatening wider attacks, but rule out sending their own combat troops.

To accompany the military offensive, France and its allies are urging Mali authorities to open a national reconciliation dialogue that addresses the pro-autonomy grievances of northern communities like the Tuaregs, and to hold democratic elections.

Interim President Dioncounda Traore, appointed after a military coup last year that plunged the West African state into chaos and led to the Islamist occupation of the north, has said he intends to hold elections by July 31.

But he faces splits within the divided Malian army, where rival units are still at loggerheads.

(Additional reporting by Tiemoko Diallo and Adama Diarra in Bamako; Writing by Joe Bavier and Pascal Fletcher; Editing by Kevin Liffey)

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