UPDATE 1-Indonesia president: attacks failed to hit economy

(For highlights of speech click on [ID:nJAK434780])

* Government to focus policies on stimulating domestic demand

* To finish reforms to take military out of civilian business * Vows to maintain fight against graft

By Muklis Ali

JAKARTA, Aug 14 (Reuters) - Indonesian President Susilo Bambang Yudhoyono said on Friday that recent militant attacks had failed to disrupt Southeast Asia's biggest economy and pledged future growth would rely on domestic demand rather than exports.

In his annual state of the nation address to parliament, Yudhoyono said in a prepared speech that the government did not plan economic policies too heavily focused on pushing exports.

"In future, we must strengthen our domestic economy, our domestic market and not just depend on strong exports as the source of our economic development," said Yudhoyono, who won a landslide victory in July 8 elections and starts a new term in office in October.

"Because of this, an export-oriented economic strategy is clearly not our choice," he added.

Indonesia is a big exporter of commodities such as rubber, nickel, coal and gas, but only around 30 percent of GDP derives from exports, far less than in neighbours such as Thailand and Malaysia, which have suffered more from the global crisis.

The government expects the economy to grow around 4 percent this year, one of the best performances in the region, helped by reliance on its large internal market of 226 million people.

Yudhoyono devoted a big section of his speech to security and tackling the roots of Islamic extremism.

A four-year lull in militant attacks was shattered last month by near-simultaneous suicide bombings on Jakarta's JW Marriott and Ritz-Carlton hotels, which killed nine people and wounded 53.

"The terrorists want us to be tense with fear and to disrupt our daily activities," said Yudhoyono.

"Thanks be to God, Indonesia is big nation, a strong nation, that is able to face any challenge, including terrorism," he said, adding the stock market and rupiah had continued to rally.

"At this time, I want to stress that our nation will not lose against terrorism."

The rupiah IDR= is the best performing currency in Asia so far this year, up nearly 11 percent against the dollar, while the stock market .JKSE has rallied nearly 77 percent.

PLOT TO ASSASSINATE YUDHOYONO

Indonesia is the world's most populous Muslim country and the majority of Muslims follow a moderate form of Islam, although an increasingly vocal radical fringe has developed in the young democracy in recent years.

Militant Noordin Mohammad Top, who formed a violent wing of the Jemaah Islamiah (JI) network, is blamed for masterminding the recent attacks and a series of others including in 2003 on the Australian Embassy in Jakarta in 2004 and in Bali in 2005.

During raids last weekend in Central Java police had initially been confident they had killed Malaysian-born Top, but in a blow to security forces forensic tests later showed it was not the wanted militant, but a suspected accomplice.

Further raids did uncover, however, up to half-a-tonne of explosives that police said militants were plotting to use to assassinate Yudhoyono using a suicide truck bomb.

Yudhoyono called for the young to be protected from "deviant thoughts" and said the government aimed to fight extremism by overcoming poverty, backwardness and injustice.

The two suicide bombers who blew themselves up the Marriott and Ritz-Carlton hotels on May 17 were aged 18 and 28 years old.

The reform-minded Yudhoyono, 59, is credited with bringing greater stability to Indonesia in his first term, although the economy still faces widespread obstacles including entrenched graft, widespread poverty, shaky infrastructure, a bloated bureaucracy and red tape that has helped deter the levels of investment enjoyed by emerging economies such as China and India.

The former general said that the government aimed to complete this year a plan to extricate the military from civilian businesses and also vowed to continue a fight against corruption. Concerns have emerged about pressures to dilute the powers of the Corruption Eradication Commission, or KPK, which has gained something of a cult status after investigating scores of officials from the central bank to parliament, jailing many.

(Additional reporting by Sunanda Creagh, Sonya Angraini and Telly Nathalia; Writing by Ed Davies)