UPDATE 10-PNG military mutiny is over, says prime minister
* PNG PM O'Neill says military mutiny is over
* O'Neill says government in control of military barracks
* No reports of violence in Port Moresby
Jan 26 (Reuters) - Papua New Guinea Prime Minister Peter O'Neill said on Thursday a military mutiny in the Pacific Islands nation was over and the government had regained full control of its military barracks, ending a dramatic day in the country's ongoing political crisis.
Soldiers loyal to former prime minister Michael Somare staged a mutiny earlier in the day, putting the military commander under house arrest and demanding O'Neill reinstate Somare as the leader of the resource-rich South Pacific country.
But O'Neill told reporters in the capital Port Moresby that military commander had now been released and the rebel soldiers had withdrawn to their barracks.
"The commander is now released, he's not under house arrest. And as a result the government has taken full control of the defence headquarters," O'Neill said.
"We will now start an investigation into the issues that the soldiers have and we'll resolve them as we move forward."
O'Neill said the mutiny leader, retired Colonel Yaura Sasa, was being dealt with, but he did not clarify whether Sasa had been detained.
Papua New Guinea has for months been gripped in a political deadlock. O'Neill took office in August after Somare was ruled ineligible as a member of parliament due to illness and absence from the legislature.
The Supreme Court in December ruled Somare be reinstated as a member of parliament. O'Neill rejected the ruling and parliament again voted him prime minister, leaving the country with two competing leaders.
In the early hours of Thursday, up to 20 soldiers raided the main army barracks, seized their chief commander and placed him under house arrest in an action dubbed Operation Protect the Constitution.
"I call on the disciplinary forces to ensure public safety by exercising restraint at all times," Somare said in a statement announcing he had appointed a new defence force chief and again declaring he was the legitimate prime minister.
Residents of Port Moresby said the dusty port capital was quiet but tense throughout the day, with roadblocks around the main army barracks.
PNG has a history of political and military unrest. An army mutiny in 1997 overthrew the government after it employed mercenaries to try to end a long-running secessionist rebellion on the island of Bougainville, home to a big copper mine.
Sasa called for Somare's reinstatement and set a seven-day deadline for lawmakers to resolve the constitutional crisis, warning he "may be forced to take necessary actions".
"I am calling on both Sir Michael Somare and Mr Peter O'Neill to recall the parliament to sort out the current political situation," he said.
Elections in PNG are due in June, but O'Neill held out the possibility of an earlier vote to sort out the crisis. Parliament is due to reconvene on February 14.
CRISIS JEOPARDISES INVESTMENT
The crisis has jeopardised PNG's prospects as an investment destination just as U.S. oil giant ExxonMobil develops a $15.7 billion liquefied natural gas plant, the country's biggest-ever resource project.
Exxon spokeswoman Rebecca Arnold said the company had been monitoring developments.
"At this stage, it's business as usual," she said.
PNG, a country of 6.5 million people, has vast mineral wealth although 85 percent of its people live a subsistence village life. Port Moresby is plagued by lawless and often violent "raskal" gangs of youths.
The military is careful to draw its membership evenly from regions and clans, ensuring no single ethnic group can take control or command enough support for a coup.
Neighbouring Australia called for a restoration in the line of command in the defence forces.
"There is no place for the military in a PNG situation," Australian Resources Minister Martin Ferguson, who is acting foreign minister, said on Australian TV.
"The sooner we return to the normal constitutional political process, the better for Papua New Guinea," Ferguson said, adding that Australia accepted O'Neill as prime minister.
Last month, O'Neill declared victory in the standoff against Somare after the governor general named him the legitimate head of government. The country's civil service, police and army leaders also backed O'Neill.
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