* Constitutional court decision is blow to government
* Likely to head off opposition unrest in major oil producer
* Parliamentary boycott blocking economic development plan
* Any new chamber set to be dominated again by gov't critics (Adds details on development plan, edits)
By Mahmoud Harby and Sylvia Westall
KUWAIT, Sept 25 (Reuters) - Kuwait's top court rejected a government bid to alter voting boundaries on Tuesday, leaving it without a clear option to break a parliamentary deadlock that has stymied important economic bills in the major Gulf Arab oil producer.
The ruling was likely to defuse tension with an opposition increasingly assertive after democratic revolutions elsewhere in the Arab world. The opposition had warned it would take to the streets if the court ruled in the government's favour.
But the decision did not solve the problem of how to set up a functioning parliament. In the last assembly, dissolved on a technicality by the Constitutional Court, Islamist and tribal lawmakers clashed with the government over finance bills including a far-reaching economic development plan.
The opposition had said the government's petition to the court to change the electoral boundaries was a manoeuvre to give the edge to government-friendly candidates in a new election.
In the event, the court declined to rule, saying it did not have the authority to dictate electoral boundaries.
The ruling suggests that a new assembly, whenever it is elected, is likely to have a similar make-up to the last one and could prove just as obstructive to the unelected government dominated by the Al-Sabah family.
Kuwait, a big oil exporter and among the richest countries in the world per capita, has a relatively open political system by Gulf standards, and has avoided an uprising like those that have ousted dictators in four Arab states since early 2011.
The cabinet said in a statement that it "appreciated" the court's decision and had asked relevant authorities to study the implications and consider the next steps. It did not elaborate.
While parliamentary approval is needed for major bills and the budget, the monarchy retains a firm grip on the main government portfolios, and political parties are banned.
"The constitutional ruling today means that the government should resign immediately," Islamist MP Faisal al-Muslem wrote on Twitter, calling for new parliamentary elections.
"TRIUMPH OF THE WILL"
"This is a triumph of the will of the nation," Islamist MP Waleed al-Tabtabie said in a message to almost a quarter of a million followers on Twitter. Along with other members of the opposition, he has been calling for an elected government.
The Constitutional Court angered protesters with a separate ruling earlier this year when it effectively dissolved the opposition-dominated parliament elected in February.
The old, more government-tilted assembly that it reinstated has been unable to convene due to a boycott by mainly opposition MPs. Analysts say this means another dissolution is likely, with a new election this year or next.
The government had said it needed the Constitutional Court to rule on the electoral law to protect future elections from legal challenges.
"The government's position has been partially compromised but this is unlikely to be a major event for the prime minister or the ruling family," said Ayham Kamel, a Middle East analyst at Eurasia Group.
The decision puts pressure on the government but also on the opposition, according to Kristian Ulrichsen, research fellow on Gulf States at the London School of Economics.
"They will need to show the electorate that they have a viable way out of the impasse, rather than the rash of populist initiatives they focused on in the last parliament," he said.
During their few months in power before parliament was dissolved, members of the opposition tried to pass legislation such as introducing the death penalty for blasphemy.
"Their focus was on anti-corruption legislation and on settling political scores," a Kuwait-based diplomat said.
In April the parliament rejected a draft bill on the country's 30 billion dinar ($108 billion) development plan as opposition deputies accused the government of failing to make progress on major investments envisaged.
The plan, spread over four years until 2014, provides for a series of huge infrastructure projects including a new airport terminal, new oil refinery and hospitals and is aimed at diversifying the economy and attracting foreign investment.
Details must be voted on each year and in April parliamentarians turned down the part of the plan for the 2012-2013 fiscal year. (Additional reporting by Ahmed Hagagy in Kuwait and Rania El Gamal in Dubai; Editing by Mark Heinrich)