* Residents fear new unrest after arrests of alleged spies
* Some Sunnis allege main Shi'ite loyalty is to Iran
* Activists see attempt to divert focus from Sunni discontent
By Angus McDowall
QATIF, Saudi Arabia, April 10 (Reuters) - Al-Awamiyah is a small village of shabby houses, narrow streets and dilapidated palm groves that has earned a big reputation as the centre of unrest among Saudi Arabia's Shi'ite Muslim minority.
In two years of persistent protests in Awamiyah and other parts of Qatif district on the Gulf coast, 17 people have died in unrest as Shi'ite youths took to the streets demanding equal treatment from the Sunni Muslim-dominated government.
Big protests erupted in Qatif in early 2011, inspired by the Arab Spring uprisings sweeping the region and feelings of solidarity with Shi'ites in neighbouring Bahrain. These drew Qatif into a region-wide contest for influence between Shi'ite Muslim Iran and Sunni Arab states such as Saudi Arabia.
Most Saudis adhere to the rigid Wahhabi school of Sunni Islam that deems Shi'ism as heretical, and some members of the majority fear the Qatif Shi'ites' first loyalty is to Iran rather than their own kingdom.
By contrast, the Shi'ites proclaim their loyalty to Riyadh and say they want an end to what they regard as neglect amidst the oil wealth of Saudi Arabia's Eastern Province where they live.
Awamiyah became known across the country as Saudi media reported on what it simply called "rioting" in the village and the surrounding Qatif district.
After several months of relative calm, some residents fear more unrest resulting in a police crackdown. This follows the arrest of 16 Shi'ites accused of spying for Iran and the first hearing in the trial of an Awamiyah cleric who may face execution.
"The government is dealing with this as a security threat, not as a political issue. Shia demands are not big. They are achievable and for not much cost," said Jafar al-Shayeb, a Shi'ite community leader and former elected head of Qatif municipality.
After the espionage arrests last month, 37 Shi'ite religious leaders in the kingdom accused the government of raising sectarian tension to distract attention from small protests staged by some members of the Sunni majority.
On April 4 hundreds marched through the urban area of Qatif, activists' videos showed, demanding the release of Nimr al-Nimr, the cleric whose arrest in the summer of 2012 led to demonstrations in which three people died. The videos could not be independently verified.
"Two years ago the only demands were to release prisoners. Now the protests demand full equality. The more force the government uses, the bigger the demands grow," said a Shi'ite activist, who requested anonymity.
That view is not shared across Qatif, however, where there is a lively debate about the wisdom of demonstrating as opposed to working with the government to address issues of concern, and over the size of the protest movement itself.
"We have sectarian problems, we have to admit that. But most of these problems are from individuals, not the government," said Nabih Ibrahim, who was Shayeb's deputy on the municipal council. "We try to solve the negative issues with dialogue."
Arriving from Qatif, the road into Awamiyah passes the mosque of Sheikh Nimr where an extension made of corrugated iron protrudes from one side of the building and black Shi'ite mourning flags flutter on another.
Officials describe Nimr as a leading figure among a small group of criminals and malcontents, inspired by Iran, who they say have carried out most of the unrest since 2011.
That description is challenged not only by younger and more radical Shi'ite activists and Nimr's family, but also other members of the community who disagree with his political stand.
"Among the youth they see him as a symbol, a brave character calling for their rights and criticising the government openly - even those who disagree with him," said Shayeb, part of an older, more moderate group of Shi'ite leaders who have distanced themselves from Nimr.
At Nimr's first hearing last week, the prosecutor demanded he face not only the death sentence, but an additional punishment mandated by sharia law for the most heinous offences in which the dead body is defiled by being hanged from a pole.
"The sheikh's thought is not extreme, it's just that he is very blunt when he expresses his opinions. But if describing things as they are is extremism, then that's a different matter," said his brother, Mohammed al-Nimr, by telephone.
Of those killed in the past two years, 15 were Shi'ites who the government said died in "exchanges of gunfire" with police. Local activists said some were unarmed protesters.
Local human rights activists and people detained during the unrest over the past two years have described being tortured while under arrest, including beatings, electrocution and sleep deprivation - charges the government strenuously denies.
"I was deprived of sleep and beaten with a cable. They said: 'admit the charges or we'll beat you'," said a 40-year-old from Awamiyah who was held in 2011, requesting anonymity.
The local Adala Center for Human Rights says 867 people had been detained in connection with unrest at some point in the past two years and 181 remain in prison. The government says a total of 278 were arrested, with 152 people still in detention.
Saudi authorities do not let foreign journalists go to Qatif independently and the visit there by Reuters was with government officials. Activists and former detainees were interviewed in Dammam, the capital of Eastern Province, without officials being present.
Take the road north out of Awamiyah and the village abruptly stops against a row of oil pipelines protected by barbed wire fencing, behind which lies open desert punctuated by electricity pylons and oil derricks.
To some villagers, this proximity to Saudi Arabia's mineral wealth is a constant reminder of the degraded state of their community's roads and houses, a tangible sign of what they see as government neglect.
To others, it signifies the price of pushing demands on the street, rather than engaging the government. "You can't have serious development if you don't have security. Lots of projects have been held up," said Abdulmohsen al-Faraj, who runs a contracting company.
Other parts of Qatif, toured by Reuters with government officials, appeared as prosperous and stable as elsewhere in Saudi Arabia.
"The people of Qatif in the eyes of the government are equal to people of other areas. It's no different to every other province," said Khalid al-Sufyan, who was appointed governor of Qatif in January, in an interview.
Shi'ites point to their limited representation in local government positions, overtly sectarian language in Saudi media, public slurs by state-employed Sunni clerics and difficulties in building places of worship.
The government denies any discrimination, but a senior Saudi official quoted by U.S. diplomats in a 2007 embassy cable released by WikiLeaks drew parallels to the treatment of African Americans in the 1950s.
The message from Sheikh Mansour al-Salman, wearing the turban and black robes of a Shi'ite cleric as he sat in the office building of the Qatif governor, was that if local people were patient, the government would address their problems.
But he warned: "The majority are willing to go with the government side... but they are waiting for tangible efforts they can see with their eyes and touch with their hands. Otherwise hardliners will take advantage." (Reporting By Angus McDowall; Additional reporting by Mahmoud Habboush in Dubai; editing by David Stamp)