OAS returns to seek deal on Honduras crisis

TEGUCIGALPA (Reuters) - An Organization of American States mission returned to Honduras on Friday to start work on negotiating an end to a standoff triggered when President Manuel Zelaya was ousted and exiled in a military coup.

Zelaya, who riled Honduran elites with his ties to Venezuela's socialist President Hugo Chavez, was toppled by a coup in June but sneaked back into Honduras last week and has taken refuge in the Brazilian embassy.

De facto leader Roberto Micheletti says Zelaya must face charges and cannot return to power, while Zelaya insists on being reinstated to office.

Honduras refused entry on Sunday to an OAS advance mission but a team of diplomats flew back into Tegucigalpa on Friday to prepare ground for foreign ministers from the region who hope to broker a deal to break the deadlock.

"Naturally we have to be cautious in all this but we are reasonably optimistic," OAS mission chief Victor Rico told reporters at the airport.

The Honduran standoff is U.S. President Barack Obama's first key test in Latin America after he promised a new engagement with a region that often had testy ties with Washington when George W. Bush was in office.

Soldiers sent Zelaya into exile on June 28 after the Supreme Court ordered his arrest. Critics say he illegally sought to amend the constitution to lift term limits but Zelaya denies wanting to stay in power.

Troops have cordoned off the Brazilian embassy but protests have dwindled since the de facto government imposed a decree banning marches in support of Zelaya, a logging magnate whose cowboy hat has become a symbol of the opposition.

PRESSURE OVER DECREE

Micheletti, a veteran politician in Central America's No. 2 coffee grower, is under pressure to seek a deal and lift the decree that has curbed civil liberties and shut two media stations loyal to the deposed leader.

U.S. officials have pressed for Zelaya's restoration but criticized his surprise return. Washington has put pressure on Micheletti's supporters by cutting aid and revoking visas but shied away from tougher measures such as trade sanctions.

U.S. Senator Jim DeMint and some U.S. congressmen met Micheletti after the Republican lawmaker criticized the Obama administration for "blind support" of Zelaya's reinstatement.

Washington, the United Nations and even some of Micheletti's local backers have urged him to lift the decree but he has resisted as the standoff edges closer to a November 29 presidential election that he says will resolve the crisis.

Micheletti has backed off a threat to shut Brazil's embassy if it does not give Zelaya asylum or hand him over to face treason charges.

"He guaranteed there is no ultimatum. It has been lifted and they can stay until a solution is found," said Bruno Araujo, a Brazilian lawmaker who met Micheletti.

There are signs a compromise could emerge as both sides face demands to find a way out. One idea is a power-sharing deal.

"An agreement may now be possible given growing frustration with the lack of a solution, weakening support for (Micheletti) and a sense of urgency to ensure the viability of ... elections," said Eurasia Group analyst Heather Berkman.

Several countries have suggested they might not recognize the vote without a prior agreement involving Zelaya.

Honduran business leaders are proposing Zelaya be allowed back without executive power and put under house arrest until his term ends in January, when he would face corruption charges.

(Additional reporting by Esteban Israel and Miguel Angel Gutierrez in Tegucigalpa; Editing by John O'Callaghan)