* Bahrain Shi'ites led uprising last year, protests continue
* Sunnis opposed to dialogue raise rhetoric against Shi'ites
* Many Sunni groups say they have reform demands too
By Andrew Hammond
MANAMA, April 5 (Reuters) - Bahrain's Sunni Muslim minority, fearful of Shi'ite political assertiveness, is spawning factions that rail against compromise with the island's sectarian majority, while nursing their own grudges against its Sunni ruling family.
The emergence of hardline Sunni groups is further evidence of sectarian polarisation in Bahrain, where a Shi'ite-led opposition movement persists despite the crushing of the mass protests it organised during last year's burst of Arab revolts.
Shi'ite reformists want an and to the Al Khalifa family's monopoly on political and economic power. Some radicals have demanded the monarchy be scrapped in favour of a republic.
The loyalist Sunni backlash, once seen as a card played by the authorities, may now upset even any royal hopes of opening a dialogue to calm a conflict that has shredded Bahrain's social cohesion and cost its tourism- and banking-based economy dearly.
While Sunni hardliners are divided among themselves, some have begun to articulate grievances about corruption, access to housing, and suspected government efforts to alter Bahrain's demography that mirror those of the Shi'ites they revile.
Sunni voices have clamoured for the government to resist the pressure of opposition rallies, clashes with riot police and quiet Western prodding for a resolution.
In social media, Shi'ites and protesters are attacked as "monkeys", "traitors" and "followers of Iran", picking up a frequent charge that politicised Shi'ites are pawns of the Islamic Republic, a large non-Arab, Shi'ite Gulf neighbour.
In the northern, mainly Sunni, district of Muharraq, al Qaeda slogans are among the graffiti on some walls and a large poster outside a Sunni Islamist party's headquarters depicts a donkey with the caption: "I'm going to dialogue!"
Hardcore Sunnis are alarmed by talks that the powerful royal court minister has held in recent weeks with the leading Shi'ite party Wefaq and secular opposition groups on a possible dialogue to halt turmoil that has deterred investors and slowed economic growth to 2.2 percent last year from 4.5 percent in 2010.
"The worst thing is happening now in Bahrain, that the state is flirting with the followers of the Safavids," wrote Sunni Islamist Mohammed Khalid on Twitter, using the name of a 16th century Persian dynasty to refer to Iran and Shi'ites. "The Sunnis are on the point of exploding."
Host to the U.S. Fifth Fleet, Bahrain has remained turbulent in the year since the authorities quelled Shi'ite-led protests that erupted after popular uprisings in Egypt and Tunisia. Daily street protests and clashes have caused continuing casualties.
The conflict drew in regional players. Saudi Arabia sent in troops to back the government, while Iranian media provide a soapbox to Shi'ites mostly excluded from Gulf-owned Arab outlets.
A senior Western diplomat voiced concern about the apparently widening Sunni-Shi'ite rift in Bahrain.
"People moving from the middle ground into the certainty of sectarianism is a challenge," the diplomat said. "A lot of voices are for retribution not reconciliation, though I think they are still a minority of Sunni voices."
With the Shi'ite street behind them, opposition parties tend to view the Sunni hardline groups - who include some Shi'ite Arab nationalists - as noise created by the government that could easily be silenced in the event of a deal.
But some wonder whether the Sunnis can still be manipulated so easily - and whether they could start pushing harder for reforms themselves, despite their fear of Shi'ite numerical strength in a more democratic political system.
Abdulhalim Murad, a Sunni lawmaker of the Salafi Asala party, says Sunni anger is running too high to tolerate any concessions to Wefaq, a well-organised political machine that has won almost half the seats in previous parliaments.
"If all parties are serious about entering a dialogue, I think everybody should stop violence in the street. Those people (Shi'ites) are trying to murder policemen," Murad said.
"It's obvious they are trying to harm the economy to pressure the government," he said, warning of a possible violent response if Wefaq gained cabinet seats in the current climate.
Sunni vigilantes attacked a Shi'ite religious procession during the Ashura commemoration in December and a protester was shot dead last week by an unknown assailant.
So far the Sunni "opposition to the opposition", as its critics dub it, has struggled to maintain unity.
Shortly after the protests erupted in February 2011, an umbrella organisation called the National Unity Gathering emerged, headed by a Sunni cleric, in a state-backed effort to create a mass movement to challenge the protesters.
But the main organised Sunni parties, Asala and Minbar, an ideological affiliate of Egypt's Muslim Brotherhood, pulled out amid personality disputes and disagreements over leadership.
"It's the first time the Sunnis have been mobilised but they don't know what they want. All they agree on is that they are opposed to the opposition," said Ala'a Shehabi, an opposition activist. "That's not enough to unify them as a group."
Surpassing the Gathering is the Fateh Awakening, a new Brotherhood-linked youth group feted in state and pro-government media. It drew 30,000 people to a Manama rally in February at which speakers attacked Gulf Arab Shi'ites as pawns of Iran.
Anas Bomtaia, spokesman for the Sunni group, denied it was doing the bidding of the authorities.
"I'm not a game in the hand of government or anyone else. Some senior government figures tried to buy us but we didn't accept a penny," he said, adding Wefaq should "apologise" for provoking a sectarian split with the Feb. 14 uprising. "We have rejected dialogue and that shows we are against the government."
Sunni politicians list demands that also come up at Wefaq rallies, including a greater say for Bahrainis in a system now dominated by the royal family. An uncle of the king has held the post of prime minister for more than four decades.
"We think that the government is not serious about fighting corruption - administrative and moral corruption," said Bomtaia, referring to the phenomenon of migrant prostitution. "We said there has to be equality between us all and the Khalifa family."
The Salafis agree they share some interests with Shi'ites.
"We have a lot of requirements in common. They are living with us, this is the reality. We all live in the same land," said Murad. Acknowledging a key opposition grievance, he also said there had been a degree of "political naturalisation".
Shi'ites often accuse the authorities of granting foreigners from predominantly Sunni countries nationality to shift the sectarian balance. Protesters say riot police contain an increasing number of Pakistanis and non-Bahraini Arabs.
The government denies any sectarian naturalisation policy.
Some analysts question its commitment to dialogue, arguing that the emergence of the Gathering, the Awakening and others is a state effort to multiply the voices raised against the Wefaq-led opposition, which includes some Sunnis and secular parties.
"I would be surprised if this dialogue being discussed now will ever have representatives of all groups in the same room," said Justin Gengler, a Doha-based researcher on Bahrain.
"Sunnis and Shi'ites making demands at the same time for substantive changes and concessions - that's not something the authorities are prepared for." (Editing by Alistair Lyon)