UPDATE 4-Yanukovich backs Ukraine compromise talks as tensions rise
* Call comes after huge pro-Europe rally in Kiev
* But opposition says police dismantle protest barricades
* Protesters angry over policy U-turn to Russia
* Pressure grows on shaky economy
By Richard Balmforth and Alissa de Carbonnel
KIEV, Dec 9 (Reuters) - Ukrainian President Viktor Yanukovich backed a call for talks with the opposition on Monday to end weeks of protests in Kiev, but tension was high with pro-Europe demonstrators barricading their protest camp in preparation for police intervention.
As riot police took up new positions in the capital, heavyweight boxing champion-turned-opposition politician Vitaly Klitschko called on the protesters to stand their ground, and warned Yanukovich that he would have blood on his hands if security forces tried to end the stand off violently.
Klitschko later tweeted that some protest barricades were being taken down by police in a southern part of the city. Across town, police dismantled tents to free the main road near the government headquarters and herded protesters back.
But no clashes were reported. Reuters correspondents at the scene said there were no attempts by police to move against the large encampment of protesters on Kiev's Independence Square, focal point of the demonstration.
Masked men with guns raided the party headquarters of jailed opposition leader Yulia Tymoshenko and took a computer server, said a spokeswoman. Ukraine's Interior Ministry said the search was sanctioned by the courts.
U.S. Vice President Joe Biden told Yanukovich "violence has no place in a democratic society and is incompatible with our strategic relationship", the White House said. Speaking by phone, he also urged the Ukrainian leader to hold a dialogue with the opposition.
With pressure growing on a shaky economy, the presidential website said Yanukovich supported a proposal for round-table talks involving the authorities and the opposition as a possible "platform for mutual understanding", the website said.
No date was given for when the reconciliation talks could be held. Nor was it clear what the united opposition's reaction to Yanukovich's proposal would be.
But it was the first real sign by Yanukovich - whose switch in trade policy away from the European Union towards Russia on Nov. 21 provoked the unrest - that he might be ready to listen to opposition demands for the resignation of his government and early elections.
Despite his words, tension rose sharply on the streets after riot police units moved to take up their positions at potential flashpoints. Demonstrators, responding to calls from opposition leaders, threw up new blocks in streets blanketed by snow to seal off their main protest camp on Independence Square.
"We call on people to stand their ground, and peacefully, without using force or aggression, to defend their right to live in a free country," Klitschko, who is increasingly being seen as a national leader-in-waiting, told Reuters.
"We are expecting the break-up by police of peaceful demonstrators. If blood is spilled during this dispersing (of protesters), this blood will be on the hands of the person who ordered it - ... Yanukovich," Klitschko said.
State prosecutor Viktor Pshonka issued a tough warning to the demonstrators to end their blockade of road access to the presidential headquarters and government offices.
"If anybody thinks that he can, with these actions, bring anarchy and lawlessness into our country, then he should drop his illusions," he said. "The law operates in our state."
The protesters have been inflamed by a police crackdown on Nov. 30. European Commission President Jose Manuel Barroso, who spoke to Yanukovich by phone on Sunday, led Western calls on Monday for authorities not to react violently.
"Those young people in the streets of Ukraine in freezing temperatures are writing the new narrative for Europe," he said in Milan. "I've asked him (Yanukovich) to show restraint in the face of these recent developments, not to use force against people who are demonstrating peacefully, to respect fully their freedom."
EU foreign policy chief Catherine Ashton expects to meet Yanukovich and opposition leaders when she visits Kiev on Tuesday and Wednesday.
Yanukovich's sudden turn towards Russia has provoked the biggest street protests since the 2004-5 Orange Revolution, when people power forced a re-run of a fraud-tainted election and thwarted his first run for the presidency.
On Sunday, several hundred thousand people turned out on Independence Square - focal point of the "orange" protests - calling for the government's resignation and early elections.
The rally, which ended with a crowd toppling a statue of Soviet state founder Vladimir Lenin, followed talks on Friday between Yanukovich and Russian President Vladimir Putin.
Neither side has yet given a detailed account of what was agreed at these talks, though Ukrainian Prime Minister Mykola Azarov said a "big agreement" had been reached.
Though most people believe Putin may have offered credits and a cheaper price for gas in return for dumping an EU trade pact, the secrecy surrounding the talks have only fuelled opposition suspicions that Yanukovich might be readying to take Ukraine into a Moscow-led customs union.
There was no immediate response from the opposition to Yanukovich's offer of talk.
But Klitschko has been calling for a meeting with the 63-year-old president for some time and he told Reuters that if he did meet him he would continue to insist on the resignation of the government.
As Yanukovich's statement appeared, riot police took up position in streets near Independence Square where about a thousand protesters camped overnight and near Kiev's city hall, which is occupied by demonstrators.
The political turmoil is deepening Ukraine's economic crisis, with the central bank taking radical action apparently to halt a slide in its foreign currency reserves.
The hryvnia currency jumped from four-year lows as a sharp rise in short-term interest rates engineered by the National Bank forced commercial banks to scramble for the local currency.
The reserves, which have fallen steadily as the central bank repaid debt and sold dollars to try prop up the hryvnia, slid further last month. It reported on Friday that they had fallen at the end of November to $18.791 billion from $20.632 billion a month earlier.
That is less than the cost of two months' imports and leaves Ukraine vulnerable to a currency crisis and possibly even a debt default.
"We estimate the critical level of reserves is around $15 billion, so authorities have less than $4 billion now to continue to defend the status quo," said Vladimir Osakovsky, an economist at Bank of America/Merrill Lynch.
Ukraine owes just under $4 billion in gas bills and debt repayments in the first three months of 2014. However, Osakovsky said foreign debt repayments were low in December and early next year, and this could slow the reserves' decline.
Overnight interest rates - at which banks lend to each other - jumped to the highest levels in a year at around 20 percent on Monday. This forced some banks to sell dollars to meet daily their funding needs, dealers said.
The action pushed the hryvnia to the highest in six weeks against the dollar but it remains under severe stress in forward markets which are pricing a sharp devaluation over the next six to 12 months.
Few people yet expect Ukraine to default on its debts. Nevertheless, it now costs more than $1 million a year to insure exposure to $10 million of Ukrainian debt over a five-year period.
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