Honduras crisis talks to resume, no deal on Zelaya

TEGUCIGALPA (Reuters) - Honduras' rival leaders agreed on Wednesday to new talks to end the country's political crisis, but they were still bitterly divided over the reinstatement of ousted President Manuel Zelaya.

Carlos Lopez, the interim government's foreign minister, said it would not give in to international demands for Zelaya's return to power in the third round of talks mediated by Costa Rican President Oscar Arias.

"This hypothesis of a possible return of Mr. Zelaya to occupy the presidency is completely ruled out," Lopez said.

Arias was expected to make changes to proposals rejected by the de facto leaders, but a Costa Rican government source said he will stick to the position backing Zelaya's return, which has been supported by the United States and Latin America.

Zelaya was also sending negotiators to the talks, a source said, but has promised to go back to Honduras without a deal if necessary, raising fears of violence.

Zelaya was seized by the military and whisked out of the country on June 28 after Honduras' Congress and Supreme Court accused him of violating the constitution by trying to extend presidential term limits. A leftist, he had angered the country's business elite by moving the country closer to Venezuela's firebrand leader Hugo Chavez.

Talks to broker an end to Central America's worst crisis in almost two decades broke down over the weekend, but Arias has apparently brought a new proposal to the table.

Honduras' de facto leader Roberto Micheletti, installed by Congress after Zelaya's ouster, has pledged to arrest the deposed leader if he tries to return.

"We are calling on the people who are with us to head to the border to accompany us as we enter the country, where the armed forces have said they will shoot and kill us on entry," Zelaya told Spanish radio.

The United States is worried Zelaya's return could spark violence after his previous attempt to land in the country in a Venezuelan plane was thwarted by the military and one protester was killed by soldiers.

RIVAL PROTESTS

Several thousand supporters of the interim government marched peacefully in the capital Tegucigalpa and filled the national soccer stadium.

Dressed in white, they waved blue and white Honduran flags and banners that read "Zelaya is a traitor" and "Peace."

"If you like Mel (Zelaya) that much, then you keep him, he's all yours!" read one placard.

"We don't just reject Zelaya, we also reject the abuse of power he planned," said history teacher Dumia Tome, 39. "We are not going to allow him back."

Around 500 Zelaya supporters staged their own march on the outskirts of Tegucigalpa to demand his return.

The crisis is seen as a diplomatic test for U.S. President Barack Obama as he seeks to improve relations with Latin America, where a growing bloc of leftist leaders that includes Zelaya has challenged Washington's influence in recent years.

Obama's administration has condemned the coup, cut $16.5 million in military aid and threatened to slash economic aid.

The U.S. State Department said it remained focused on mediation, and that Secretary of State Hillary Clinton had made clear to the interim government there would be consequences if it failed to reach a deal.

"The secretary made very clear ... that it's important for the de facto regime to take a serious look at the mediation effort by President Arias," department deputy spokesman Robert Wood told a briefing.

In Washington, a congressional aide who has been in contact with negotiators for the Micheletti government, said he thought the interim leaders were becoming more pragmatic.

"I think they are not shutting the door on a whole set of issues that they didn't (entertain) before," including the possibility of a unity government, he said.

One idea is to create a coalition government that would include Zelaya, Micheletti and the head of the Supreme Court, the aide said. Other ideas include inviting U.S. lawmakers to come to Honduras on a fact-finding trip.

Zelaya has called on Obama to impose tough new sanctions against those that toppled him.

Honduras, one of the poorest countries in Latin America could be hard hit by sanctions.

The economy relies heavily on coffee and textile exports as well as family remittances from abroad and is projected to contract by about 2 percent this year.

In 2008, international aid accounted for 10 percent of the government's budget and up to 20 percent this year, said Eurasia Group analyst Heather Berkman.

(Reporting by Simon Gardner, Gustavo Palencia, Esteban Israel and Sean Mattson in Tegucigalpa; Writing by Mica Rosenberg; Editing by Kieran Murray)