* Clashes with police in provincial town
* Residents say they live in poverty despite energy wealth
* Algerian government wary of contagion from "Arab Spring"
By Christian Lowe
LAGHOUAT, Algeria, Jan 12 Every time it rains, Fatina Binoun takes her three young children to stay with relatives because she is afraid the downpour will bring down the walls of her decaying house.
Binoun, 30, and her husband live in a rented two-storey building in the Algerian town of Laghouat, on the northern edge of the Sahara desert about 400 km (250 miles) south of the capital.
A crack several cm (inches) wide runs up the corner of the house. Inside, the rooms are cold and damp. The kitchen ceiling is falling down. The authorities cut off the gas supply, saying they feared an explosion if the house falls down.
Binoun's husband earns about 18,000 dinars (200 euros) a month repairing mobile phones, not enough to rent better accommodation.
The family applied to the local authorities to be re-housed under a state programme which provides new apartments, free of charge, to needy families. But that was 12 years ago.
"They (local bureaucrats) ask for money," said her husband, 36-year-old Sid-Ali Touati. "If you give money you get an apartment. If you do not give money, you do not get an apartment."
Algeria is a major oil and gas exporter with more than $150 billion in foreign currency reserves accumulated over years of high energy prices.
Yet despite its wealth, the government has been unable to build new homes fast enough to satisfy millions of families who live in inadequate accommodation or to provide jobs for the millions of unemployed.
It was anger over miserable living conditions in a provincial town in neighbouring Tunisia that set off the first "Arab Spring" revolution.
Leaders in Algeria, which has many of the same problems as other countries swept up in the upheavals around the Middle East over the past 12 months, worry the same scenario could be repeated in their country.
In Laghouat, a provincial capital of 200,000 people, anger at living conditions has already touched off unrest -- several hundred people have been protesting for the past week outside the offices of the regional governor.
Local human rights activists said police used truncheons and tear gas to break up the protest early on Tuesday. More than 40 protesters were arrested, though most have since been released, activists said.
On Wednesday the protesters were back in a square about 300 metres (yards) from the governor's office. Lines of police, in riot gear and carrying truncheons and shields, blocked the road to prevent them from getting closer.
The spark for the protests was the re-housing of dozens of families from a shantytown on the edge of Laghouat to a new apartment complex paid for by the state.
Thousands of families across the country have already been moved to new accommodation under the scheme, part of a state programme to build 1 million new housing units by 2014.
But in Laghouat, thousands have been on waiting lists for years and the protesters say the latest resettlement is symptomatic of a process that is riddled with corruption.
They said people who paid bribes or had connections with local officials were given new apartments, while families in greater need were left off the list.
According to a list seen by Reuters, many of the people allocated new apartments were not from Laghouat, and multiple apartments were given to members of the same family.
"The system is corrupt," said Mohamed Mamir, a 45-year-old unemployed man at the protest. "Local officials ... give housing to their own cousins."
An official at the headquarters of the regional administration told Reuters the wali, or governor, and his chief of staff were out of the office and unavailable for interview. The official said no one else was able to comment.
Yacine Zaid, a local human rights activist who has been monitoring the protests, said that late on Wednesday the wali passed a message to the protesters to say the list would be changed. It was not clear if that meant the authorities would evict people from the apartments they had just been given.
The anger in Laghouat is heightened by the fact that the region itself is rich in resources. To the south is Hassi R'mel, a massive natural gas field.
"We supply (gas) to Europe, to Spain and Italy, but there is a contradiction," said Faisal Bessegur, 35, an unemployed man. "In Laghouat we have injustice, the problem of housing, corruption and unemployment."
More than most of its neighbours in north Africa, Algeria is a tinder box. The country is emerging from a conflict between Islamist militants and the security forces which is estimated to have killed about 200,000 people.
The violence has subsided following a security crackdown and an amnesty for militants who laid down their weapons, but a rump of insurgents affiliated to Al Qaeda still mounts sporadic ambushes and suicide bombings. Many of the tensions that started the conflict 20 years ago are still unresolved.
The protesters in the square said they were not interested in overthrowing the government, however, and just wanted the wali to step down. To underline the point, they waved posters of the 74-year-old president, Abdelaziz Bouteflika.
But the risk remains that protests like the one in Laghouat could spread to any of the dozens of other towns which face similar problems of poor housing and unemployment.
Algeria will in May hold a parliamentary election, its first since the Arab Spring, which could act as a catalyst for a nationwide outpouring of frustration over these issues and a perceived lack of democracy.
"I have lots of people calling me from other towns, asking me what is happening here," said Zaid, who is the local head of the Algerian Human Rights Defence League. "They (the authorities) are afraid that this could spread."
The operation to re-house residents from the shantytown at the edge of Laghouat left some people even worse off than they were before. As soon as residents were rehoused, bulldozers were sent in to demolish their old homes but a handful of people did not qualify and so were left with nowhere to live.
Although it is on the edge of the Sahara, Laghouat is on a high plateau and bitterly cold, especially at night.
On Wednesday morning, 67-year-old Haniyah Ziyani was tending a fire in front of a makeshift tent assembled from blankets, tarpaulin sheets and some oil drums. Inside was her 34-year-old mentally-handicapped daughter.
Ziyani wept as a bulldozer worked about 100 metres away, clearing the rubble.
Asked why she had not qualified for re-housing, she said: "They demanded bribes. I do not even have money for food. How am I going to pay a bribe?"
A short distance away stood Bouzid Beli, 75. His home now is a tarpaulin supported by a wooden pole, with some sheets of corrugated iron around the side. The bed was a few blankets laid on the bare earth.
He had the same explanation for what happened: corruption.
"It's very cold," he said, shivering and fighting back tears. "I have nowhere to go." (Editing by Sonya Hepinstall)